What is Making These Two FTSE Listed Stocks Resilient and Cash Generative: Dixons Carphone PLC and AA PLC?

The Global markets traded higher on Friday (8^th May 2020) as sentiments were upbeat on reopening of economic activities and signs of improving China-US relations. Even, the British market closed this short weekend on Thursday, 7^th May 2020 on a blistering note with inspiring China’s export data. Following the optimism, two general retailers - Dixons Carphone PLC and AA PLC surged 8.35 per cent and 8.16 per cent, respectively (at the close of trade as on 7^th May 2020). The bounce of AA PLC was coupled with its full-year 2020 results, quoting the business as resilient and cash-generative. Both the Companies have been adopting several cost reduction programmes to mitigate the short-term uncertainties presented by COVID-19 mayhem, while proactively maintaining the capital structure to stay buoyant. The brief glimpse of their latest updates depicts that the business operations are not materially impacted by the Coronavirus outbreak so far. Let’s quickly deep dive through their operational and financial performance to throw light on the outlook and business growth trajectory.

Dixons Carphone PLC (LON: DC.) – Resiliently generating sales through the online channel, while Nordic stores continue to operate with required social distancing measures.

Dixons Carphone PLC is a FTSE 250 listed company, which is engaged in omnichannel retailing of mobile and consumer electrical services. The Company has operations in 9 countries which are catered through 14 brands, around 1,599 stores and a workforce of 42,000 people. Its brands include Carphone Warehouse, Currys PCWorld, iD Mobile, Elkjøp, among others.

On 25^th June 2020, the Company will release its preliminary results for FY2020.

(Source: Company Website)

Key Financial Highlights for the Year 2019

(Source: Company Website)

Significant Regulatory Updates of 2020

• 29^th April 2020: Amidst the Covid-19 imposed restrictions, DC’s brand Currys PC World has introduced personal shopping service through the video link.
• 17^th March 2020: The Group decided to close its UK based 531 standalone Carphone Warehouse stores and focusing on selling mobile through online and 305 big Currys PCWorld stores.
• 20^th January 2020: Lindsay Haselhurst was appointed as Chief Supply Chain Officer of the Dixons Carphone.

Update (as on 9^th April 2020) – Reflecting Robust Sales in all Open Channels

• The Greek and UK&I stores that are closed would generally have been projected to contribute an additional sale of around £400 million in this current fiscal year. The online division has recovered approximately two-thirds of the lost store sales in UK&I Electricals.
• For home office equipment, the company has seen robust demand in April 2020, which includes computers and home networking, as people work and communicate remotely. The sales from Gaming and TV have also been robust in the current period.
• During this current period, the group closed 531 standalone Carphone Warehouse stores in the UK.
• DC has prolonged its committed debt facilities with an additional RCF (Revolving Credit Facilities) of £266 million and now has total committed facilities in excess of £1,350 million. At the year-end, Dixons Carphone will have net debt of approximately £300 million, excluding IFRS16 lease liabilities and access to more than £1 billion of unutilised committed facilities.
• During the unprecedented crisis created by COVID-19, the Board has decided not to pay a full-year dividend for the existing year.
• The Group’s major focus is on three priorities, since the start of this crisis:

1. Keeping the Colleagues and Customers Safe (closure of stores, online operations stay open and enabled working from home),
2. Helping the Customers’ and
3. Securing the Future (20 per cent pay reduction for All Executive and Board members and a 10 per cent pay reduction for other senior leaders as well as no corporate bonus payment in UK&I).

Share Price Performance

Daily Chart as of May 7th, 2020, after the market closed (Source: EODHD/Others, Thomson Reuters)

DC’s shares closed at ~GBX 76 on 7^th May 2020. Stock's 52 weeks High is GBX 166.45 and Low is GBX 53.50. Total outstanding market capitalization stood at around GBP 878.96 million, with an annual dividend yield of 2.96 per cent.

Short Term Business Scenario

In the Nordics region, the stores continue to operate to hygiene standards and high social distancing. In the current crisis, the company is launching live video shopping for online clients, innovating in various ways and contactless shopping in-store. The group witnessed strong growth in its online trading across all countries and compensated for a decline in the sales from stores. The group remained focused on ensuring the health of its employees and has taken additional measures to protect them. The company is looking to seek cost support from the Government and will not be paying the final dividend. Dixons Carphone has Revolving Credit Facility of more than GBP 1 billion. The group believe it has sufficient funding capacity to meet its obligations.

AA PLC (LON: AA.) – Operating with Decent Financial and Operational Position, while Proactively Managing the Debt.

AA PLC is a UK based auto services company. It is engaged in the roadside and insurance businesses. It also caters the roadside assistance market along with training through their Driving Services division.

(Source: Annual Report, Company Website)

Robust strategic performance in changing markets

Roadside Division

• The Average income per member stood at GBP 162 in FY2019 versus 157 in FY2018, reflecting an increase in market share and position.
• The Average income per business customer was GBP 21 in FY2019 as against 20 in FY2018.
• The Number of business customers stood at 9,793 thousand in FY2019 as against 9,928 thousand in FY2018. The Group is operating as a market leader in business-to-business, with approximately 10 million customers.

Insurance Division

• The Average income per insurance policy for motor and home stood at GBP 69 in FY2019 versus GBP 74 in FY2018.
• Total motor and home policies sold in the last 12 months by insurance broker was 1,561 thousand in FY2019 as against GBP 1,447 thousand in FY2018.
• Total motor and home policies sold including renewals (Underwritten insurance policies) stood at 598 thousand in FY2019 as against 407 thousand in FY2018.

(Source: Annual Report, Company Website)

Vital Developments of 2020

• 23^rd April 2020: The Company’s subsidiary, AA Senior Co Limited has withdrawn GBP 199.7 million of Senior Term Facility for the repayment of GBP 200 million of Class A3 Notes issued by AA Bond Co Limited.
• 31^st March 2020: The Group collaborated with London Ambulance Service to ensure 24 hours roadside support for battling coronavirus contagion.

Results for the Year Ended 31 January 2020 (as on 7^th May 2020) – Reflecting Decent Performance, with the Resilient and Cash Generative Business Model

• In the financial year 2020, the revenue increased by 2 per cent to £995 million as compared with the previous year (2019: £979 million), reflecting solid performance across both Roadside and Insurance.
• Trading EBITDA increased by 3 per cent to £350 million in FY20, in line with market expectations.
• Led by a gain from the early settlement of deferred consideration related to AA Cars acquisition and lower adjusting operating items, the Operating profit was 17 per cent higher from the previous year.
• PBT (profit before tax) and PAT (profit after tax) were ahead of last year; adjusted EPS (earnings per share) decreased by 5 per cent to 14.1 pence, due to lower adjusting operating items.
• In FY20, the capex of £69 million was in line with guidance. On 31st January 2020, the cash and cash equivalents were £159 million and an available working capital facility of £50 million. Strong free cash flow generation of £83 million was in line with guidance.

Share Price Performance

Daily Chart as of May 7th, 2020, after the market closed (Source: EODHD/Others, Thomson Reuters)

AA’s shares closed at ~GBX 29 on 7^th May 2020. Stock's 52 weeks High is GBX 77.05 and Low is GBX 13.32. Total outstanding market capitalization stood at around GBP 175.52 million, with an annual dividend yield of 2.11 per cent.

Outlook – Expecting Positive Cash Generation in the Near Term

Annual cash saving expected to be around £6 million per annum. The consultation has resulted in an improvement to the defined contribution scheme which was being agreed for affected employees. It will cost approximately £11 million over the three years starting from 1 April 2020. The company has shown improvement across all metrics in FY20. In Roadside business, the revenue remained flat with the acquisition of AA Prestige offset by lower B2B revenues as well as the benefit of higher B2C income. Proactive measures in place to minimise the impact of COVID-19 and as a result, the company expect current year performance to be slightly below FY20 period. The business is demonstrating resilience around Trading EBITDA and positive predictable Cash generation.