Investec has issued a 'buy' recommendation on Dixons Carphone as the newly merged company should benefit from strong buying synergies and is well-positioned to capitalise on structural changes in mobile.

After Carphone Warehouse and Dixons Retail completed their merger, Investec analyst Alistair Davies took a fresh look at the potential benefits of the deal, spying superior earnings growth potential and an undemanding valuation.

He says the merger creates a company "well-equipped to deal with increasing levels of connectivity and convergence in technologies with mobile devices an important part of daily life".

"This could become a lucrative earnings story longer term, but is small today, in our view. Thus, near term focus is on maximising the profitability of existing businesses."

Nearer term, he sees potential for upside to £80m of synergies from improved buying terms with key suppliers such as Apple or rolling out Carphone's mobile specialties across a greater portion of the Dixons estate.

Further margin expansion at Dixons to the top end of management's 3-4% range is possible from improving sales and gross profit densities and a re-engineering of the cost base.

"Carphone Warehouse is well-positioned to capitalise on potentially positive structural changes in the mobile market, such as greater postpay penetration, increased data usage and higher profitability for 4G connections."

He admits in the short-term revenue and profit growth is expected to be more pedestrian as industry pressures on average revenue per unit persist.

As interest costs fall and restructuring charges unwind, 11% growth in earnings before interest and tax translates into 15% compound annual growth rate in earnings per share.

"This is superior to the sector and we believe the shares can support a premium rating."

OH

Related share prices
Dixons Carphone (DC.) share price