Currys (CURY) 60.1p

Market cap: £681.3 million

Buy electricals retailer Currys (CURY) following the washing machines-to-smartphones purveyor’s second full-year profit upgrade within three months (18 March). Currys’ latest positive earnings revision demonstrates that self-help measures under CEO Alex Baldock’s stewardship are starting to pay off.

And given its UK and Nordics market leadership, the FTSE 250 retailer looks an exciting earnings recovery candidate now that interest rates have peaked, which should lead to a pick-up in consumer confidence. While the bidding war some hoped-for has fallen away, further suitors cannot be ruled out and downside risk is now more limited given the recent takeover interest, which highlighted the strong underlying value at lately unloved Currys.

I’M STILL STANDALONE, YEAH, YEAH, YEAH

Shares believes Currys’ refusal to give in to what looked like a pair of opportunistic bids from US firm Elliott Advisors is to be applauded. The board stood firm and spurned takeover bids pitched at 62p and 67p, which it argued ‘significantly undervalued’ the business and future prospects which have been strengthened by the turnaround progress under Baldock, as Shares outlined in December.

Currys’ decision to fend off the formidable Elliott also deterred Chinese e-commerce colossus JD.com (JD:NASDAQ) from making a formal bid. However, that boardroom defiance has heaped extra pressure on Baldock to deliver a much-improved share price; to at least the 67p level Elliott was prepared to pay would be a good start. That said, Investec Securities’ leveraged buyout model suggests potential for a bid of at least 87p per share, implying 45% upside from current levels if such a bid came to pass.

The broker also highlighted that a significant proportion of Currys’ UK estate comes up for lease renewal over the next five years where historically, rent reductions of as much as 36% have been achieved.

‘This is clearly of interest for potential buyers with strategic plans, thus we would not rule out further bid interest from new parties,’ said Investec.

PLUG-IN TO THE RECOVERY

In its unscheduled post-offer period update, the super-size TVs-to-tumble dryers purveyor said it had delivered stronger than expected sales in the period since peak trading. As a result, Currys expects adjusted pre-tax profit for the year to April 2024 will be ‘at least £115 million’, ahead of the previously guided £105 million to £115 million range.

Currys attributed the upgrade to positive like-for-like sales over the January-to-March period in the UK & Ireland, where the company has encouraging momentum, and in the Nordics, where the recovery is on track under a new leadership team.

Gross margins remain ‘robust’, insisted Currys, which also called out continued strong growth in higher margin services.

The retailer operates on razor-thin margins, so investors were reassured to learn that it continues to target adjusted EBIT (earnings before interest and tax) margins of ‘at least 3%’ with a focus on sustainable free cash flow generation. Lingering balance sheet concerns were also put firmly to bed with news the disposal of Greek business Kotsovolos is on track to complete in the first half of April, which will result in the retailer closing the current financial year in a net cash position.

JUST TOO CHEAP

Liberum Capital forecasts an uptick in pre-tax profits from a shade above £115 million this year to £119.2 million in full year 2025, ahead of a surge to £144.7 million in full year 2026.

Based on forecast earnings per share of 8.3p and 10.1p for 2025 and 2026 respectively, the shares trade on grudging single digit prospective price to earnings ratios of 7.2 and 6, which give no credit to any prospect of a recovery in earnings.