Currys shares drop over 6% after RBC downgrade on valuation concerns

Investing.com -- Currys (LON:CURY) shares fell more than 6% on Monday after RBC Capital Markets downgraded the stock to “sector perform” from “outperform,” citing limited valuation upside following a 31% year-to-date rally. 

The brokerage also removed its prior “Speculative Risk” qualifier, reflecting the company’s improved balance sheet.

RBC maintained its price target at 140p, representing a 14% potential return from the last close of 124.30p. However, analysts noted the stock now trades at roughly 11x CY25e P/E, above its five-year average of 8x and near the upper end of its historical valuation range.

The downgrade stems from a view that Currys is no longer trading at a discount and that better upside exists in peers such as B&M and Avolta.

Currys has undergone a turnaround since late 2023, aided by the sale of its Greece business, which improved its investability. 

The company has focused on expanding in underpenetrated segments such as Computing, Mobile, and Health & Beauty, while growing its Services and B2B operations.

B2B currently accounts for just 3% of U.K. sales compared to 12% in the Nordics, with management aiming to double the U.K. figure over the next three years.

Despite these efforts, RBC sees headwinds from macroeconomic uncertainty and consumer sensitivity, particularly in the Nordics. 

While interest rates are easing in the region, consumer confidence remains fragile in Sweden and Finland, with only Denmark showing improvement. 

In the UK, real wage growth is expected to fade, and consumer caution may return amid tax concerns.

Currys’ financial performance has seen improvements, including three earnings upgrades in FY25. 

However, recent forecast momentum has slowed. RBC slightly lowered its FY26–FY27 EPS estimates by 1–3% due to higher expected interest costs, though operating profit forecasts remain largely unchanged. FY26 EPS is now forecast at 11.7p, down from 13.0p, while FY27 is lowered to 12.6p from 13.0p.

Revenue is projected to grow modestly from £8.71 billion in FY25 to £9.07 billion in FY26 and £9.35 billion in FY27. 

Operating profit is expected to rise from £237 million in FY26 to £249 million in FY27, with EBIT margins holding around 2.6%–2.7%. Currys ended FY25 with £184 million net cash and is expected to reduce pension contributions from £78 million this year to zero by FY27.

RBC values the company using a blended discounted cash flow and sum-of-the-parts model, with the DCF implying a fair value of 134p. The downside scenario assumes a 90p share price if sales and margins weaken, while the upside scenario suggests 175p if revenue and profitability outperform.