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Margin squeeze at Carphone Warehouse

RESULTS: Profits may have beaten analysts' consensus estimates, but margins continue to suffer amidst a weak pre-pay market
November 14, 2012

Cost-cutting measures Carphone Warehouse's (CPW) half-year profits to beat brokers' consensus estimates. But the group continues to suffer margin pressure amidst a weak pre-pay market - leaving few catalysts for share price upside.

IC TIP: Hold at 186p

The gross margin at the core CPW Europe operation - a 50 per cent joint venture with Best Buy Europe - dropped 370 basis points, to 25.2 per cent. That reflected a higher proportion of post-pay smartphones sales, which aren't as profitable as as unsubsidised pre-paid devices. Underlying cash profits here slipped to £52.5m from £63.2m and connection volumes dropped 11.5 per cent to 4.4m.

Still, an uplift in UK post-pay business did help CPW Europe to grow sales 8 per cent to £1.66bn and a wider range of lower-priced smartphones is expected to hit the market over Christmas, giving a welcome pre-pay boost. Management expects restructuring-related costs in the second half, however, although analysts at Bank of America Merrill Lynch estimate that could deliver pre-tax cost savings of £20m-£25m.

At Virgin Mobile France, where Carphone holds a 46 per cent stake, revenues grew 9.2 per cent to £191.7m, after adjusting for unfavourable currency swings - reflecting post-paid growth and the generation of mobile termination revenues for the first time.

Bank of America Merrill Lynch expects full-year adjusted EPS of 11.8p (2012: 12.1p).

CARPHONE WAREHOUSE (CPW)

ORD PRICE:186pMARKET VALUE:£879.4m
TOUCH:185-186-p12-MONTH HIGH:186pLOW: 120p
DIVIDEND YIELD:2.7%PE RATIO:1
NET ASSET VALUE:140pNET CASH:£81m

Half-year to 30 SepTurnover (£m)*Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20112.805.301.001.75
20125.408.301.501.75
% change+93+57+50 -

*From wholly-owned operations only