Dixons Carphone could deliver investor bonus, HSBC thinks

Ahead of a strategy update two months away, Dixons Carphone shares do not reflect enough optimism about the potential for new management to improve performance and dividends, said HSBC as it upgraded to 'buy' from 'hold'.

Having a deep dive into Dixons Carphone six months after the appointment of chief executive Alex Baldock, HSBC was impressed with his performance so far and with the "encouraging" implications of the new bonus structure, which is tied to free cash flow rather than earnings per share.

The group’s cash generation has been disappointing in recent years but, said the bank, the top end of management’s new long-term incentive plan targets points to three-year cumulative cash flow that would be equivalent to more than a third of the current market capitalisation.

“Dixons Carphone is a strong market leader with a well advanced multichannel platform and right-sized property portfolio. This arguably makes it lower risk than many stocks in the sector," the analysts wrote.

Baldock is scheduled to provide a strategy update in December, with the analysts expecting him to either reveal plans to fix Carphone's position in mobile phone retailing or exit this section of the market, neither of which should be a disaster. In fact, the analysts expect the strategy update in December to be "positive" overall.

"The current share price appears to reflect much of the bad news of the new strategy, but none of the good, with the shares well supported by even the low end of FCF targets."