The painful reality of trading in the uber-competitive Nordics is something that the management of Currys has been too slow to grasp. It has cost the electricals retailer dear, with another double-digit dive in the shares taking the price to the lowest point since the aftermath of the 2008 financial crisis.
The company has been too slow to cut costs down to size to fit a more aggressive trading environment in the Nordics, a region that still accounts for 40 per cent of sales. The business sank to a loss of £11 million over the 12 months to the end of April, against a profit of £130 million the year before. That drove the overall pre-tax profit down more than a third, even after stripping out the £511 million impairment charge relating to the 2014 Dixons/Carphone Warehouse merger. It also tipped it into a £97 million net debt position for the first time since 2020.
Now Currys is in cash preservation mode. The final dividend has been scrapped, pension contributions cut for the next two years and it has asked lenders to relax covenants until October next year. It is aiming to cut capital expenditure by around a quarter this year to £80 million, which would take the two-year reduction to more than a third.
The business generated around a quarter less cash last year, which after paying the rent on its shops, interest on its debt and contributions to its defined benefit pension scheme, among other outlays, pushed the group into its net debt of £97 million. True, it has £636 million of liquidity across its debt facilities, which is easily above the £74 million it burned through last year even after funding its day-to-day operations.
Still, there is no timeline for when the group will be back generating free cashflow or when it will shift into a net cash position, even if it expects progress on both this year.
The assumption of Alex Baldock, Currys’ boss, is that it has plugged enough holes to withstand another deterioration in the electricals market over the next 12 months. But northwards, there is no end to the discounting in sight.
Price wars can be self-destructive, yet ambitious rivals might have the stomach to continue undercutting to win market share. Where does this leave Currys? Costs can only be cut so far. The question is whether Baldock and co accept defeat and exit the market altogether.
Things are hardly rosy at home, either. Like-for-like sales are down 7 per cent, worse than the 6 per cent decline across the market, and implying a far greater fall in sales volumes given inflation. Losing market share meant cutting prices in the UK and Ireland last year, although Currys did push forward gross margins by increasing sales of credit and insurance products, which are more profitable than tech products or appliances.
Pushing services as well as increasing online sales, which dipped slightly to 34 per cent of the overall mix last year, were both part of Baldock’s “transformation” agenda. But for all that talk, underlying operating profit in the UK last year of £170 million was still lower than the £180 million generated by the core electricals business in 2019, the first full year after Baldock took over.
A pandemic boom in spending on tech has given way to stagnation, exacerbated by a failure to cut costs. Only in 2025 do analysts at Investec expect Currys to be near the £156 million adjusted pre-tax profit generated in 2021. Just when it will hit a 3 per cent adjusted operating margin, which had been pinned on 2025, is highly uncertain.
The jury is still out on whether cost-cutting efforts in the Nordics will be enough for Currys to succeed in a ruthless market, or whether more drastic action will be necessary.
ADVICE Avoid
WHY The risk of profits and the dividend disappointing market expectations this year looks high
HICL Infrastructure
Infrastructure funds are in a bind. Shares across the sector trade at a steep discount to net asset value, which precludes any good actor from raising cash on equity markets to invest in making acquisitions.
HICL Infrastructure is no different, its shares trail its net asset value (NAV) by 21 per cent. The sell-off across the sector is a consequence of rapidly rising interest rates and doubt over whether the peak is in sight.
For HICL, the higher cost of capital pushed up the discount rate applied to its assets to 7.2 per cent at the end of March, up from 6.6 per cent at the same point last year. Another bump seems likely. Then again, higher inflation should also mark-up its cashflows, which are linked to the index. Last year the latter won out, which pushed up the NAV to almost 163p a share, after deducting dividend payments.
That dividend is set to be held flat at 8.25p a share out until 2025, which leaves the company without an increase in the payment since 2020. At least that payment was covered by cash generated by its assets last year, although only just, at a ratio of 1.03.
HICL’s largest asset is Affinity Water, which supplies parts of London and the south, and accounts for 7 per cent of its assets by water. HICL has not taken a dividend from the company since the current five-year regulator period began in 2020. There would be a harder case to make for extracting cash, given that the water utility has notional gearing of 73 per cent, above Ofwat’s 60 per cent target.
How does HICL expand from here? Gearing, which encompasses debt held at the individual project level and is non-recourse to the company, stands at 66 per cent. It is reluctant to dip further into its floating rate £600 million revolving credit facility, which is £360 million drawn.
That leaves it eyeing disposals to raise funds to put into new assets and pay down debt. The market is slower, although it managed to net £108 million in proceeds last year.
Without signs of the discount rate stabilising, it is hard to see the gap between the share price and NAV closing.
ADVICE Hold
WHY Further rate rises could weigh on sentiment towards the shares
