Carphone Warehouse Group plc Ordinary 0.1p (CPW)

Company overview

HL Update (9 May 2008)

Speculation that Carphone’s growing relationship with US electrical retailer Best Buy would eventually lead to a full blown joint venture have finally materialised. Best Buy bought a 3pc share stake in Carphone back in September 2007. Carphone has announced that it will sell 50pc of its retail operations to Best Buy for £1.1 billion and that they will form a new company with each owning a 50pc stake. The new company will roll out Best Buy consumer electronics stores in certain European markets from 2009, and will also expand the existing Carphone Warehouse retail store portfolio in Europe. Carphone will retain its fixed line telecoms business in the UK, comprising TalkTalk, AOL Broadband and Opal, as well as its share of the Virgin Mobile France joint venture. Proceeds of the sale will be used to pay down company debt, invest in broadband customer growth, along with investing in new areas of growth presented by the new company.

On the downside, Carphone management expects the transaction to prove dilutive to earnings by 10pc to 15pc over the year to March 2009. On the plus side, management estimate that Carphone’s telecom business could grow faster than anticipated once the Best Buy stores are rolled out because of the opportunity for better distribution of bundled services. The deal is subject to approval by Carphone Warehouse shareholders. On balance, market consensus opinion remains positive in tone.

Previous HL Update (15 April 2008)

The groups recent fourth quarter trading update (15April08) effectively saw management guiding down analysts full year profit forecasts, as a combination of higher group interest payments and continued investment costs in group expansion were expected to impact. Furthermore, whilst connections for mobile, fixed line telephones and broadband internet continued to rise, management did concede that the environment for consumers had deteriorated. In addition, the connection numbers themselves fell marginally short of some analysts’ expectations. On the positive, the company is still expanding, with its customer offerings remaining competitive and rivals such as BT Group seen as vulnerable. On balance, market consensus opinion is currently favourable in tone, although a number of analysts may now be reassessing their opinions.

HL Comment (18 January 2008)

Having commenced trading back in 1989, Carphone Warehouse has achieved impressive growth in order to become Europe’s leading independent mobile communications retailer. Having achieved a significant presence in the world of mobile phones, in April 2006 Carphone Warehouse decided to launch a broadband internet service. Customers can receive a free broadband internet service, as long as they sign up to the group’s fixed line telephone service ‘Talk Talk’, which requires them to pay the normal monthly line rental fee.

The group’s recent third quarter/post Christmas trading update (18Jan08) saw management providing full year profit estimates in line with current analysts’ estimates. Total distribution sales during the third quarter period came in at £900m, marginally short of consensus estimates (919m), whilst total mobile connections rose by 11pc to 3.6 million. In the group’s fixed-line business, total revenues were up 36pc to £349m, whilst the broadband business managed to add 118,000 net new customers over the quarter – now providing a total of 2.6m. As regards the group’s exclusive agreement to sell Apple’s new iPhone in Europe, whilst not confirmed, the deal is expected to have both continuing direct and indirect benefits, with more consumers visiting group stores.

On the negative side of the equation for investors, many of the mobile phone groups have become more aggressive in their direct offerings to customers and competition across both mobile communications and broadband internet provision remains intense. On the positive, the group remains focused on its core business and management’s marketing skills are unquestioned. Market consensus opinion remains positive in tone.

All yield figures are variable and not guaranteed.

Fundamental Data

* Prior to 2nd April 2005, figures were stated under UK Generally Accepted Accounting Principles (GAAP). Recent figures stated under International Financial Reporting Standards (IFRS).