Thursday, February 29, 2024

    Currys no longer flavour of the month in the Scando countries

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    Currys has a claim to being the UK’s most infuriating retailer – not for the customers, but for its shareholders. This is a company that generates £10bn of annual revenues and enjoys No 1 positions in all its territories – the UK and Ireland, Greece and the Nordics, which means everywhere from Finland to the niche market of Greenland.

    It is generally regarded as being well-managed, at least since chief executive Alex Baldock arrived in 2018, and there is no problem with the balance sheet. Yet the stock market capitalisation is just £700m. Even in a low-margin game like consumer electricals, being valued at less than one-tenth of revenues is a shocker.

    The main frustration for the past half-decade has been the fact that Baldock’s predecessors had the terrible idea of merging with Carphone Warehouse in 2014, one of the worst deals in modern retailing history. The mobile phone market shifted and all the standalone phone shops were closed in 2020. Even now, echoes are heard in the £511m non-cash impairment charge in Thursday’s half-year numbers.

    Now comes a fresh disappointment. Just as Baldock’s restructuring treatment seems to have fixed the UK and delivered the desired “omnichannel” capabilities, the corporate crown jewels – operations in the wealthy markets of Norway, Sweden, Denmark and Finland – have lost their sparkle. After a Covid whoosh, rivals piled up with stock only to run into weakening demand. The result is a price war fierce enough to cause Currys, the group, to knock £25m off its full-year profit forecast; the new estimate is £100m-£125m.

    The Scando discounting isn’t “permanent or structural” and competitors can’t sustain “current levels of desperate and unprofitable pricing”, says Baldock. No doubt he’s right, but he was vague about timing. A target for a group-wide operating margin of 3% has been pushed out to the 2025 financial year.

    The stars will align eventually for Currys, one still suspects, because the operational strategy seems spot-on and recessions don’t last forever. But you also see why the shares, down 6% to 61.5p, seem stuck at the lowly rating. Nothing is ever straightforward with this company.

    Drax plays it modest

    A third profits upgrade this year delivered only a modest boost to Drax’s share price because the potentially market-moving event lies ahead. It is how the government fine-tunes the windfall tax on electricity generators as it applies to biomass plants. A decision has to be made soon because the levy kicks in at new year.

    Thus Drax was at pains to point out that its upwards tickle to top-line earnings for 2022 (now to be “slightly above” previous City forecasts of up to £681m) was mostly due to outperformance by its hydro operations. Fair enough. Hydro, as a source of power that can be turned on and off quickly, is playing an increasingly critical role in balancing the electricity network.

    By contrast, you’d almost believe the biomass business was a tale of woe. The cost of wood pellets in the European spot market “has increased significantly” with higher energy and transport prices, said Drax. Cargoes are “trading at over three times their historic average”. Add in the windfall tax and generation could become “less economic” at times and “restrict the group’s purchase of additional biomass cargoes at spot prices”. Translation: please don’t hit us too hard with the levy.

    Since the design of the levy allows adjustment for increases in generators’ costs, Drax will probably get something from its negotiation with government as long as it can show the workings behind its calculation that the “all-in contracted costs” for biomass for UK generation will be over £100 a megawatt hour in 2023 (which almost makes nuclear look cheap).

    But ministers would be wise to inspect the details. Drax’s top-line earnings last year were £398m and it now expects to achieve close to £700m in 2022. The company is not doing badly amid energy volatility.

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