Remarkably unremarkable (and 15 qs)
A year unlike any other but Tesco still made guidance In April 2022, Tesco set its sights on delivering GBP2.4-2.6bn of retail EBIT in 2022/23, today it reported GBP2,487m. To say there was a lot going on in-between is an understatement and when margins are this low, it could have gone very wrong; we estimate Tesco faced GBP5bn of cost pressure through the year. To finish the year almost perfectly in the middle of it is guidelines demonstrates a journey that is remarkable for being unremarkable. Tesco and the wider food retail industry seems to be reformed. We reiterate our Outperform, holding our 330p TP steady. Societal pressure to keep profits pinned back In our recent sector note, we set out the reasons why we think the food retailers are now a lot more investible and hidden in the depths of the messaging today, the tone on the consumer seemed to be a little more optimistic than it was in January. Falling cost pressure and robust wage growth seem to be taking the edge off what seemed to be a bleak outlook albeit, we must acknowledge some consumers are still having to make some very tough decisions and there is societal pressure on Tesco to do what it can to mitigate at least some of that pressure. But in time, profit growth opportunities are there, if only with a little g Now then does not seem to the be the point where Tesco or indeed, any other European food retailer will be sanctioning material profit upgrades, but could there be at least some profit growth, if only with a little ''g''? At the net income level, we doubt it; a higher tax rate is a headwind in 2023/24 but thinking further out as societal pressure to grow earnings eases, Tesco is again talking about opportunities from media income, even if the group is still reluctant to put figures to it. Cutting forecasts for higher tax rate We leave our EBIT forecasts mostly unchanged and think the group can do a touch better than its guidance of broadly holding retail EBIT flat in...
13 Apr 23
Decent end to FY22/23; momentum to moderate in FY23/24
Tesco’s preliminary FY22/23 performance was slightly ahead of our as well as the market’s expectations. The group’s lfl sales came in at +5.1% (+94bp vs consensus), with positive momentum in all business segments. The adjusted operating profit of £2,630m (-6.9% yoy) was in line with the street’s expectations. For FY23/24, we expect Tesco’s top-line growth to moderate, volume to recover slightly and profitability to decline slightly. We maintain our positive stock recommendation.
13 Apr 23
Strong Christmas underpins Q3 performance; testing times ahead!
Tesco’s trading performance for the Q3 plus Christmas (19 weeks ended 7 January 2023) was broadly in line with our expectations. The Group’s lfl sales grew 6.4% during the period, with all retail segments clocking robust momentum. The management has confirmed the annual profit target: operating profit for the retail business at £2.4-2.5bn, £120-160m for the banking operations and group FCF of at least £1.8bn. Despite announcing a good start to 2023, Tesco’s FY23/24 earnings are likely to remain under pressure. We maintain our positive stock recommendation.
13 Jan 23
In control, despite the chaos (and 15 qs)
In control of its destiny. Tesco remains our most preferred It says a lot about Tesco (and Sainsbury''s yesterday) that despite billions of cost pressure - more than they could ever hope to even touch with cost saving, let alone offset - they will finish 2022/23 with the EBIT they targeted at the start. Indeed, except for Colruyt, this is a theme across food retail. Investor anxiety is high given ongoing cost pressure for consumer and company. But if markets were rational in 2022 and cost pressure is likely to ease in 2023, at what point do you become more constructive? With a 9% free cash flow yield, Tesco remains our most preferred. Consensus seems to have been de-risked for 2023/24 asking for only flat EBIT We''ll have to wait until FY results (13 April) for more precise guidance from Tesco on 2023/24 but it seems to us that consensus has been de-risked asking for only flat retail EBIT. Though we''ve no doubt you can find better profit growth elsewhere, a much sharper focus on capital allocation means cash conversion has improved sharply and even with our more cautious definition, we think Tesco can comfortably deliver GBP1.5-1.6bn of free cash flow next year after GBP1.8bn this. With a buyback (we pencil in GBP750m in 2023/24), there is tangible payback from a lot of heavy lifting. A very rational market where it is easy to identify losers The market of course fears consumer spending. With 7% LFL growth in the UK, Christmas seems to have again been an island with the consumer now retrenching. But it is a familiar message and with trading down from dining out and so higher margin premium ranges, there are opportunities too. But it''s also a market where it is easy to identify losers (Morrisons of late, we think a poorly differentiated ASDA will lose its recent momentum) and crucially, rational behaviour. Nudging up TP on better cash flow and unwind of discount Market structure remains the most important question to answer in food retail and in...
12 Jan 23
SHORE CAPITAL - Tesco Ireland photo-pack - Sandymount, Dublin refit
Tesco Ireland photo-pack - Sandymount, Dublin refit Sandymount (Dumhach Thra) is one of the finer districts of Dublin, a city that evolved into a international place of self-confidence, whereas its nearest neighbour, the United Kingdom looks something of a world where the lunatics have literally taken over the asylum. On a recent visit to see investors and friends in Dublin, Shore Capital Markets took the time to also visit a refit of the modestly sized Tesco supermarket in Sandymount, one that in recent times has looked a little tired, especially given the considerable household wealth surrounding the 'village green'.
02 Nov 22
SHORE CAPITAL - Tesco^ (TSCO, Hold, 216p)
Tesco had a good H1 FY23 and, to us, is executing well bolstered by a strong balance sheet (asset-backed, a good pension position and low non-lease net debt). That said, with concerns over the consumer environment and operating cost headwinds (labour and energy) we confirm our previously communicated downgrades to FY24 (flat on FY23). Despite reduced forecasts, Tesco’s stock appears undervalued on an FY24 PER of just 10.4x, an EV/EBITDA multiple of 6.9x and a FCF yield of >8%. However, the problem for us is the robustness and visibility of forecasts, set against a UK economy going into recession with tax rises, spending cuts and elevated borrowing costs. Frustratingly, we keep a HOLD stance for now.
02 Nov 22
Better placed to tackle the ‘Discounter Juggernaut’
Tesco’s share price is down >25% YTD, plagued by weakening consumer sentiment and increased earnings pressure in the UK. Even the strong half-yearly performance could not lift investor sentiment. We expect consumers to incline more towards the German discounters in the near-term, looking to cut corners wherever possible. The recent rebound at close competitor Asda (lesser market share erosion) complicates the matter further. While Tesco’s mid/long-term fundamentals and valuation remains attractive, we have trimmed our near-term EPS forecasts.
11 Oct 22
Better placed to tackle the forthcoming headwinds
Tesco’s Q1 trading performance was a mixed bag. The UK and ROI retail business was softer than expected but overall sales were stronger than our estimates. Wholesale business Booker and Central Europe led the pack. The company witnessed market share gains in almost all geographies. However, management has accepted that cost pressure is posing a challenge. The annual profit outlook has been maintained. We will trim the financial estimates slightly.
17 Jun 22
SHORE CAPITAL - Tesco (TSCO) - Buy 280p
We expect Tesco to deliver a very good FY22, which it has just completed, so no change to our forecasts, with free cash generation expected to be very strong (>£2bn). The Group will update on its surplus cash strategy through its April preliminary results. For FY23F, we believe we have been too optimistic on our base expectation for Tesco Bank, whilst we observe elevated energy costs, in particular, with caution. Set against an expectation that Tesco UK is not going to over-inflate in the manner prior regimes did through the Great Financial Crisis (so letting in the German discounters), we are downgrading our FY23 CPTP estimate as a precaution by c£87m (c4%). We have not been guided down, this is our view, one where we expect many British companies to meet FY22F but perhaps appraise pre-Ukraine invasion estimates here on. All this said, Tesco is an asset-backed, effective-operating free cash generator where the buyback programme should continue whilst the dividend is secure (FY22F yield 3.9%). BUY.
03 Mar 22
SHORE CAPITAL - INITIAL MORNING TRADING COMMENTS 01 FEBRUARY 2022
Issuer Sponsored QUADRISE FUELS+ (QFI, 2.16p, House Stock) – Appointment of Non-Executive Chairman FTSE 100 TESCO^ (TSCO, BUY at 297p) Operating adjustments to cut costs – closing Jack’s and further counter rationalisation FTSE All share AG BARR+ (BAG, House Stock, 496p) - Trading beyond pre-Covid levels, excellent cost recovery and cash generation NWF GROUP^ (NWF, Hold at 214p) – Strong H1; FY22F outlook and forecasts unchanged. AIM DSW CAPITAL+ (DSW, House Stock at 119p) – Empowering professionals DUKE ROYALTY^ (DUKE, Buy at 38.5p) – A record quarter SURESERVE GROUP+ (SUR, House Stock at 90p) - Another ten-year contract announced WARPAINT LONDON+ (W7L, House Stock, 154p) - Strong trading drives a beat to FY21 expectations Cross Sector SHARE & SHARE ALIKE – The Year of the Tiger – Docile or volatile?
TSCO QED DSW DUKE NWF SUR W7L
01 Feb 22
Cementing the footprint despite turbulent times!
Tesco’s H1 performance was stronger than our and the street’s expectations. The key takeaways were positive lfl in Q2, a gain in market share, step rise in operating profit and a credible plan to generate future growth. Moreover, the success in clocking price deflation (despite external headwinds) and adept supply chain management were also some noticeable developments. We remain positive on the company’s management and the stock’s prospective performance. We will improve our financial estimates and target price.
11 Oct 21
The rerate wait is over (and 15 qs)
Tesco more than delivered for us; where should we rerate it to? Our cautious stance heading into Tesco''s H1 results was misplaced. Though the group issued subdued H2 guidance (fairly flat versus H2 2019/20) after a strong H1 (21% ahead of H1 2019/20) as we expected the broader messaging more than compensated. A new GBP1.4-1.8bn free cash flow ambition was the highlight; at the middle of the range, the yield is c8%. Having had a frustrating wait, it seems a rerating is under way. The question then is, what is the right multiple? Our new 345p TP still isn''t shooting for the stars Given the willingness to issue free cash flow guidance, we now think Tesco''s rerating can be bigger. Our preferred valuation approach is EV/EBIT and if you put Tesco UK on the same multiple as Ahold Delhaize (15.3x 2022E), you''d derive 355p. If you wanted to aim higher, Unilever (390p) or Walmart (450p) would be living the dream. There is of course the obvious point that Tesco still needs to execute against the plan but if we aim for a notch below Ahold Delhaize (15x), we hit our new 345p TP (from 310p) which would equate to a c6% FCF yield at the mid-point of guidance. Cheap and cheerful - an attractive combination in food retail The track record for making money buying cheap food retailers is mixed; its often earnings that are wrong, typically because of price competition. There''s no doubt there''s plenty of inflation and disruption around which poses a risk. However, we remain of the view the UK market is rational with private equity ownership likely to make it more so. Tesco is also outperforming, and sales momentum tends to stick in food retail. Tesco is cheap, cheerful with best in class ESG credentials. Growth comes with a small g but that''s not the call; it is capital into cash flow Though Tesco took the time to talk up its earnings opportunities during the presentation, notably supplier income, big margin moves are not an aspiration. Earnings growth is...
06 Oct 21
Making it easy
A cautious outlook might be the focus from H1 results, 6 October From afar, food retail is a space where you should be able to take a two-week holiday and not worry about your holdings. Not Tesco. Whether it be a bout of price competition, concerns on capital allocation or more lately, missed or even own goals on cash return, the story has been frustrating. With a new CFO at the helm however, the ambition seems to be making the story for investors a lot easier. We have confidence it can be, and the shares can re-rate further in the next 12 months. A cautious outlook though seems likely at the H1 results on the 6 October. We navigate the agenda. H1 was good but we expect the tone for H2 to be cautious H1 was very good for Tesco. Market share gains for a mature market leader are rare in food retail yet a combination of Aldi price matching / Clubcard exclusives seems to be stemming market share loss to discounters and winning share from ASDA, now owned by private equity. We think private equity equates to more benign conditions - good news when cost inflation is high. The H2 outlook is likely to be cautious however given the building inflation story and supply chain disruption. We think the group can finally put to bed uncertainty on the capital framework Whilst Tesco can''t fully control the cost environment, it can do a good job of making it seem easy even though we know things like labour shortages in HGVs or deeper in the supply chain (e.g. staff in abattoirs) aren''t. What Tesco can control however is capital allocation and cash return. We think some new lines in the sand are probable (3x lease adjusted net debt / EBITDA rather than 2.5?) helping us better model the timing and magnitude of cash return. We would though be surprised if the group openly guided to a free cash flow ambition like Sainsbury''s or Carrefour. Online and medium term growth opportunities probably in focus too Falling online penetration takes the pressure off online...
29 Sep 21
Strong H1 FY22F anticipated, upgrades
Tesco displayed understandable caution with its FY22F guidance in spring 2021 and the overall environment still contains fragility and uncertainty, e.g., industry operating costs. Whilst so, we believe that the Group has had a strongH1 and we feel it appropriate to upgrade our expectations for Tesco Retail EBIT by c.5%. We expect Tesco to set out the basis of a refreshed Group capital allocation strategy in its 6 th October interim results, although we do not anticipate any distributions to commence at that time. We reiterate our long-standing view of Tesco as cash-compounding business where earnings growth, income and shareholder friendliness can drive rating expansion. BUY.
01 Sep 21
Decent start of the year
There were no major surprises in Tesco’s Q1 trading update. The group’s lfl growth of 1.0% was led by a revival in the catering business (+68.1% yoy). Online growth also remained robust at +22.0%. Management has confirmed the annual guidance. We continue to see Tesco as the healthiest amongst the UK’s ‘Big Four’ players and maintain the positive stance on the stock’s valuation.
18 Jun 21
If expectations are low, our optimism is high (and 15qs)
When the market''s optimism has gone, ours ticks up Price competition and high expectations are probably the two biggest enemies of the listed food retailers. With Tesco''s free cash flow yield at c.8%, it''s hard to argue that investors have high expectations for the business. We ponder then why the shares are down on a trading beat. Perhaps it was the lack of earnings guidance upgrade (flat retail EBIT versus 2019/20), perhaps it is fears of cost inflation or maybe the ''whisper'' was higher? Regardless, low expectations are often an opportunity and we think Tesco''s H1 results (6 October) could be the potential catalyst. Inflation is a worry for some but we and Tesco seem more relaxed At present we see two big short-term questions for Tesco; how does the industry manage cost inflation and what is the right capital framework. It''s ironic that in some cases (Kroger yesterday for instance) management teams seem keen to actively embrace the prospect of inflation (it keeps the PandL ticking over) whereas in others, the market worries about passing it through (UK food retail). We''re minded to look at inflation as more of a neutral - what Kroger misses for instance is its cost inflation before it hopefully hits the shelf-edge. The tone from Tesco however sounds relaxed. H1 results; a clearer capital framework and potential for an earnings upgrade We stick firmly to our view that the target for a capital framework is in many respects academic; whether it''s 2.5x adjusted net debt / EBITDA or 3.0x, the cash won''t just disappear (it''s in the share price or in your pocket). Consistency however is key and it has been lacking. We expect to hear a more definitive message at the H1 results by which point some of the macro uncertainty should have revealed itself more. Given the latter is the principal reason for the cautious guidance, we could get an earnings upgrade too, helping finally put a bit of positive momentum into consensus. Small tweaks to forecasts,...
18 Jun 21
Q1 FY22 trading statement. An undervalued cash compounder...
Tesco has announced its trading performance for Q1 FY22, the 13 weeks to the 29th May. We see this update as sound and consistent with our FY22 EPS expectations. Still quite early in the current financial year, we are not adjusting our EPS forecasts, and as such, we would be surprised to see much movement around consensus at this juncture. Accordingly, a frankly dull stock in recent times is unlikely to offer a notable catalyst for rapid share price appreciation in terms of near-term upward earnings momentum albeit we continue to see a free cash flow yield of 8%+ (with most of that resource going to shareholders in one form or another) as representing good value. We reiterate our BUY recommendation.
18 Jun 21
Q1 FY22 trading statement preview - no change to forecasts expected
Tesco will issue FY22F trading data on Thursday 17th May. This update is likely to be the only engagement with the market until its interim results in October. We point out that amidst pandemic influenced trading conditions, that current one-year sales is not the only metric to consider at this time, so keep in mind the two-year sales stack, the change in online grocery participation and the direction of travel on COVID costs, mix and working capital.
15 Jun 21
A softer closure to the year
Tesco’s preliminary results for FY20/21 were ahead of consensus but below our estimates. The strength in the UK & ROI was offset by a weak show in Central Europe and Tesco Bank. Going forward, we expect some moderation in sales but the operating profit is estimated to improve. Online is also likely to remain a key growth engine. We will be trimming the financial estimates but maintain the positive stock recommendation.
14 Apr 21
We''re happy to wait at the pub (and 15 qs)
Negative LFL, online, cash return disappointing... what''s to like? LOTS! With even Tesco encouraging customers to get back to the pub, it seems the peak sales uplift from COVID-19 has passed. Attention shifts to the longer-term consequences and how the sector trades as we move through negative LFL. On the latter point, we won''t hide our nerves but we''re happier to start at the low multiples that Tesco trades on. On the former, online is the obvious point and we think Tesco has a good story (strong locations, data analytics to help gross margin). It can also more broadly capitalise on strong customer metrics. The story just calls for some (more) patience. Could Tesco have a VW moment? An investor asked us today, can Tesco be like one of the conventional car manufacturers? Having been pounded by a view that electric vehicles were the future, it turns out the incumbents are the market leaders and the likes of VW are up 60% in 3 months. Could we apply the same to online grocery? When the likes of Gorillas or Getir are raising funds at very high valuations, why doesn''t Tesco (and others) get more credit? We maintain our view that the online story isn''t a black and white ''it loses money'' and Tesco has a better story to tell than most. It just needs to tell it. Disappointed again on cash flow guidance With a new CFO waiting in the wings, perhaps we shouldn''t have expected much commentary on cash generation and use. Even so, we are disappointed the company wouldn''t even sanction our medium term estimate of GBP1.5bn of free cash flow on the call. We think though the market is rational and we have confidence in the forecast offering strong down side protection we think. Asking for a little more patience but still think it can come together The shares today have to process subdued guidance (retail EBIT flattish in 2021/22 versus 2019/20) but we think Tesco is likely keen to under-promise and over-deliver, particularly with a new CEO. The bank...
14 Apr 21
A reset... but not as we know it
The shares won''t look after themselves; what to say differently to reflect a job well done? A lot went right in Tesco''s 2014-2020 yet from a shareholder perspective, performance was disappointing - the shares today are essentially flat from when Dave Lewis took over as CEO in September 2014. Having been in the role for 6 months, Ken Murphy, Tesco''s new CEO must be very aware that even when things are going right operationally, the shares won''t look after themselves. So what needs to be done and said for the shares to finally reflect a job well done? Tesco should pitch itself as a predictable good citizen It''s pretty common for an incoming CEO in food retail to ''reset the PandL'' but in this case, we see little need; performance seems solid. The shares though seem to have paid the price for a perception that the story has ''over-promised and under-delivered''. Collectively we all have to bear some responsibility, be that giddy expectations on synergies from Booker, or misunderstanding or miscommunicating capital targets. However, a new CEO offers the opportunity for a communication reset... Tesco; a predictable, good citizen with cGBP1.5bn of free cash flow? The market is craving a consistent and definitive capital framework Having set a capital framework steering us we thought to cash return we''ve seen Tesco move the goal posts twice and more lately, disassociate a capital target with capital return. The ''good news'' is that the bad news is out of the way; Tesco probably won''t announce a cash return on 14 April (FY results). It can however set a clear and definitive capital framework, even if the new CFO is joining in May. We think amount and timing are secondary to consistency and greater predictability. Tesco has a better narrative than most for online - it just needs to share it more The other big question and probable brake to the share price is online grocery. It''s ironic that the food delivery names are falling over themselves to get...
06 Apr 21
Setting out FY2021 expectations
Tesco is coming to the end of a tumultuous FY2021 in good shape and heart, in our view. Ken Murphy, the Group's CEO, will no doubt chronicle a remarkable year for the business, one in which it contended with the challenges and opportunities posed by the pandemic, completed the Asia disposal, and further underscored Tesco as an industry leader. Following a call with management, we leave our FY2021 CPTP forecast unchanged, though tweak down EPS to reflect post-consolidation share numbers, looking for 16.1p (excl. business rate payment). Looking to the future, we anticipate initial strategic continuity between the Lewis and Murphy regimes. However, whilst the strategy may evolve over time, we expect the fundamentals to remain centred on a capital disciplined cash compounder, focusing upon free cash flow generation and returns to fund a progressive dividend policy and share buy-back programme. We forecast a flat year-onyear DPS of 9.15p, assuming a temporary dip in cover given the exceptional year. On a FY2022F PER of 11.2x, we reiterate our BUY stance on defensive Tesco.
23 Feb 21
Cash compounding or ASDA pounding
Might a highly levered ASDA be an opportunity too good to miss? For some time, our thesis on Tesco was that it was moving into a stable margin, cash generative, dare we say dull phase. But circumstances change. COVID-19 is still a material uncertainty and seems likely to disrupt the new financial year - we trim forecasts as it is likely to be a net negative for earnings. But rather than being a ''cash compounder'' and returning funds, might Tesco find a better short-term use for some of its excess capital? Having argued there''s not much price elasticity in the market, a soon to be levered ASDA may be an opportunity too good to miss. ASDA won''t just roll over but it is already under pressure The first thing we''d say is that under new management, ASDA isn''t about to simply roll over. But the reason ASDA was sold for a low price (c10x EV/EBIT) is, we think, that it is tightly squeezed between discounters on one hand and a strong group of mainstream competitors at the other end. We think the main reason people go to ASDA is either there isn''t an Aldi or Lidl nearby (or if there is, it''s very busy) or for cheap brands. Tesco''s Clubcard Prices (brands at discounts) already seem to be undermining the latter point so Tesco could do a little more, particularly with supplier support? Could Tesco be forgiven for again deferring cash return? Does a new management team get credit for returning cash an old team generated? On the one hand it reinforces the sense of continuity and confidence in the future but it is also an admission other options are limited. Tesco has seemed close to returning cash before, only to disappoint when goal posts were removed so it needs to tread a fine line. But in a scenario where it perhaps turns up the margin investment dial a touch and gets a decent return, investors should be forgiving. Having pencilled in a buyback for the new financial year, we now remove it Having pencilled in a GBP500m buyback for 2021/22, we cut it...
22 Feb 21
Q3 trading update: staying ahead of the curve
Tesco has reported a strong trading performance, largely driven by the UK and ROI. Once again, online was a key growth engine with c.80% sales growth. Despite an increase in the COVID-19-related costs (+£85m to £810m for FY20/21), the company has maintained annual retail operating profit (excluding the business rate payment) to be at least equal to the previous year. We maintain a positive outlook for the stock’s valuation.
19 Jan 21
Compelling value (and 15 qs)
Good prices for consumers, good prices for shareholders We suspect some might dispute the claim that Tesco ''won Christmas'' in the UK (Lidl for instance reported 17.9% sales growth, most of which is LFL). Either way, +8.1% LFL is clearly very strong but should of course be seen in the context of exceptional circumstances that lifted all boats. Though the outlook is (hopefully) one of normalisation, the set-up seems strong with Tesco''s value credentials for both customers and shareholders compelling we think. Tone on price investment remains comforting One of the concerns on the equity thesis remains pricing pressure from the discounters and it could be argued that Tesco''s Aldi price match is lighting the touch paper to a period of deflation and margin pressure. Tesco however seems keen to sound much more conciliatory; we''re not after Aldi...we''re just trying to remove a reason not to shop with us. It''s those sorts of remarks which reaffirm our view that the UK food retail landscape is relatively benign, albeit at times noisy. If you can build confidence in that, you can build confidence in earnings and cash flow. Online profitability remains a concern but we hope to build confidence in 2021 Online remains one of the other barriers to investing but the group thinks that over time, the gap in contribution margin can be closed. There remains a credibility gap here for the industry - in short, we need detail. However, we think 2021 will see more colour. Elsewhere Booker is feeling the challenge of wholesale and Central Europe was impacted by curfews. But these feel transitory and market weakness is normally something big players can capitalise on. Eyes now on the share price performance post the special dividend We''ve nudged down our estimates for Booker''s performance in particular but the change is pretty small. Eyes now on the share performance post the c50p special dividend (due around 26 February). The shares will look markedly cheaper as...
14 Jan 21
OVERWEIGHT; Looking forward to Christmas 2020
The market share data from the likes of Nielsen continues to yield encouraging news for the British supermarkets; four-week (4W) sales growth of 6.9% is way ahead of our January 2020 expectations for the sector. We anticipate strong Christmas 2020 demand for the UK grocers and whilst CY2021 poses comparative and maybe UK-EU operating challenges, working from home and capacity reduction in the Food & Beverage (F&B) channel make for an elevated two-year sales stack, with a sound outlook thereafter. The industry is competitive, albeit inflation at c1.0-1.5% persists, but operating costs remain under attack; see Sainsbury’s recent actions. Accordingly, with negative working capital and capital discipline, we see a sector displaying strong free cash flow (FCF) generating capabilities, that leads us to suggest undervalued equities. Indeed, if double-digit prospective FCF yields persist we see major take-out activity, and Tesco is not too big to be shielded from such activity. OVERWEIGHT.
TSCO SBRY MRW MKS
10 Nov 20
Bear spray (II)
The best way to tackle the bear thesis is consistency... patience can bring reward The ''it is duller than you think'' investment thesis has served us well in the past and though it might not get the juices of everybody flowing, history would suggest that for investors, it can work well. It''s not to say Tesco is devoid of opportunity. However, when the shares are held back by fears on what price competition and online might do to the industry profit pool and cash flow, steady and consistent delivery is the best counter and potentially the most exciting win for the shares. Following H1 results last week, we update our thoughts on the key price and online debates. A noisy pricing environment but there''s little logic in a price war If the bears are right on price competition in the UK then it has the potential to be much more damaging to the industry profit pool than online. But ask yourself this; what''s to be gained? If the UK food retail market is all about price, why is Aldi struggling to hold share despite c7% p.a. space opening? Data suggests price elasticity is very low in the UK. We doubt a price war is coming. Online is a major focus but we should at least focus on the ''less bad'' The reason Aldi is losing share is the lack of online proposition we think. Though it may be trialling options, we''d be surprised if an already low cost, low margin business could digest a large scale online business, even click and collect. Meanwhile, the rest of the industry is making progress with Tesco highlighting the positives of click and collect or automated picking. With penetration already high, much of the negative is already in the base and if Tesco can focus on at least reducing the loss, penetration can move higher with profit potentially growing. We flesh out some thoughts. A good start from the CEO - we doubt the story is about to be upended We thought Tesco''s new CEO, Ken Murphy, did a good job last week. It was particularly encouraging to...
15 Oct 20
Strong H1 trading in the British Isles – upgrades!
Dave Lewis is in the final furlongs of his tenure as CEO of Tesco and he passes the baton onto Ken Murphy with his business trading strongly, demand bolstered by remarkable behavioural change through H1. In the face of enormous upheaval, a material cost spike and a loss-making Bank, Tesco has clearly delivered very strong trading momentum, which has allowed management to now focus upon mix and cost to beneficial financial effect. With the Asian disposal set to emerge mid-H2, we put through small (+3%) upgrades to our FY2021 CPTP expectations and keep our BUY stance, reiterating our expectation of strong cash generation on a sustained basis (FCF yield FY2022F-2023F average >10%), which can and will benefit shareholders with the Group leverage target of 2.5x forecast to be achieved in FY2022. A normalised FY2022F PER of 10.2x and EV/EBITDA multiple of 6.2x are too low, in our view. BUY.
02 Sep 20
Reintroduced forecasts highlight free cash flow potential – upgrade to BUY
Tesco’s Q1 FY2021 trading update unsurprisingly confirmed robust trading momentum, driven by the shift of calorie consumption into the home from out-of-home, whilst also confirming a significant step up in costs (H1 weighted) to manage through the Covid-19 crisis. Helpfully, management was able to provide some clarity on its profit expectations for FY2021, with Retail guided flat year-on-year and significant book losses in the Bank (£175–200m). With guidance on board, we reintroduce forecasts for Tesco which point to an EPS decline in the current year of 11%, followed by a sharp rebound in FY2022 and further growth thereafter. Tesco’s cash flow credentials are also clearly to the fore, and with leverage targets soon to be met we see scope for all of the double-digit postcapex FCF yield to be returned to shareholders on an annual basis, through dividend and buy-back activity. A 10.5x FY2022F PER and 6.5x EV/EBITDA multiple look undemanding in our view, and we upgrade our recommendation to BUY (from Hold).
05 Aug 20
Staying put amidst uncertain times
Tesco’s share price has declined over the past few weeks, and this is despite announcing strong Q1 results. While FY20/21 is likely to be a tough year (benefits of high sales volume and business rate relief offset by the spike in pandemic related expenses), we reiterate our faith in the business strength of the retailer.
12 Jul 20
Cementing the legacy (and 15 Qs)
Dave Lewis is leaving Tesco in much better shape. COVID-19 could well do the same Tesco is quite rightly mindful not to look at COVID-19 as a positive but away from the personal suffering, it seems likely that the group and Big 4 UK food retailers will exit the crisis in a stronger position than they entered. Reflecting on his last (near) 6 years in charge, Dave Lewis, the outgoing CEO told a story of progressively removing reasons to shop elsewhere (notably Aldi) and the crisis seems to have reinforced that story. We think the business he leaves is in a much better position with sustainable cash generation the result. At some point, the shares will catch up. An extraordinary period for trading but Q1 is history you wouldn''t extrapolate from In what was clearly quite an extraordinary Q1, it doesn''t seem to matter that Tesco''s UK LFL was a little under expectation (8.7% versus 10.5% consensus) when other bits of the business were much better (notably Booker at +0.6% versus -14.4% consensus). Further, the outlook of flattish retail profit was reiterated. We still think that sounds cautious but having been top of consensus, we trim our retail EBIT forecast 5%. However, we still have 7% growth in retail profit year on year. A cautious message on the bank but we don''t think that exciting for the shares The message on the Bank was much more cautious; against us and consensus pencilling in a GBP15m loss this year, the new guide is a loss of GBP175-200m. Accordingly, there''s a reasonably large cut to consensus to come (c7% to EBIT at the mid-range). However, we''re minded not to base a thesis on 2020/21 profit, particularly as IFRS-9 creates volatility in bank earnings. Our forecasts for 2021/22 are in contrast little changed, the small cut reflecting minor revisions for the bank (note we value it on P/TBV so there''s little impact on our group TP). Tesco doesn''t seem to be lining up for a fight on price - a positive for all Heading into the rest...
26 Jun 20
Q1 FY2021 preview - the Coronavirus quarter
Tesco last updated the market on trading amidst the full heat of the Coronavirus crisis, when FY2021 guidance was curtailed leading us to withdraw our forecasts. A focused Group with Poland now leaving the business may provide the basis for estimates to resume through its Q1 FY2021 trading statement; we expect to at least provide a central scenario. As to Q1, we expect very strong grocery retail sales, weak catering activity within Booker and poor general merchandising sales. In all, we feel Tesco may signal to better than flat year-on-year Retail EBIT, excluding its IFRS 9 burdened Bank. We are warm to capital disciplined and free cash generating Tesco, let's see if we can become warmer still post next week’s update? HOLD
19 Jun 20
Call with management - a transformed and focused entity, a cash compounder
Shore Capital recently staged a conference call with Tesco's Chief Finance Officer, Alan Stewart, and Director of Investor Relations, Chris Griffith. As may be expected, no current trading information was discussed, noting that Tesco has withdrawn FY2021 financial guidance in light of the considerable business and economic uncertainty surrounding the Coronavirus crisis albeit indicated that, the Bank aside, Retail trading profits, taking the potential costs associated with the Coronavirus crisis into account, could be flat year-onyear. Following the Group's FY2020 preliminary results, which were issued on 8th April, Shore Capital withdrew our FY2021 Tesco financial earnings estimates and brought our recommendation on its stock back to a HOLD. We will seek to re-commence sensible forecasts as soon as possible, noting that the Group next updates on trade through its Q1 FY2021 trading statement on 26th June.
26 May 20
Lockdown brings more dire but expected data - Wipe out/Stabilisation/Rebuild - CY2020-22
The BRC-Shopper Trak Footfall data for March brings with it few surprises in a time when it is now reasonably hard to shock with appalling numbers due to the transformation in expectations and numbness of repeated numerical body blows that the lockdown has brought to UK retailing. Whilst so, this data allows us to introduce our expectations for the timeframe that lockdown may impact earnings for much of the UK consumer economy.
20 Apr 20
COVID-19. Week 4 - settling down into a new 'normality'?
Last week, we wrote of a potential shift of food demand in the UK from the out of home Food & Beverage sector to Retail. By Friday eve the Prime Minister had closed all the pubs with a lockdown of sorts announced on Monday. The British food system is now in a new norm, a temporary one the length of which will be determined by the trajectory of the invisible Coronavirus. In aggregate the industry has done wonders to meet the demand challenges with a number of organisations probably ‘butter side’ up from a financial perspective. Whilst so, it is far from universal with F&B taking a battering and food to-go, food for now and food on the move (note Gregg’s close down) notably down. With lots of uncertainty about how Easter will pan-out and higher operating costs, we would say that four weeks in from a financial perspective the food system is '2-1' up (maybe even an away goal) but no more. The length of the game is uncertain. Whilst the earnings impact remains to be seen, we highlight the probable notable boosts in time to cash flow from operations from these negative working capital business models, although we are keeping an eye on fuel impact. Improved liquidity and solvency is enough for us to reiterate our positivity on Morrison, Sainsbury and Tesco.
TSCO MRW SBRY GRG MKS
26 Mar 20
Dave Lewis sells Asian business, for a premium!
Tesco has announced the disposal of its Asian business to CP Group, the largest conglomerate in Thailand. The $10.6bn cash deal (equivalent to £8.2bn) tops the market’s expectations and a healthier balance sheet should help Tesco to tackle better the increasing competition on its domestic turf. We remain positive on the stock.
09 Mar 20
Tesco tackling the discounters head-on
Tesco has announced yet another bold move to stay afloat / preserve market share in the tough UK grocery market – management plans to price-match Aldi on hundreds of essential products. Improved price perception is the aim but profitability erosion is also a likely side-effect. While Tesco is better placed (enjoys 2x operating margin) vs close peers, this step may not be enough to plug the customer leakage completely. The competition will only intensify henceforth.
05 Mar 20
Tesco to check-out from Asia?
Tesco is evaluating the strategic options for its Asian business (Thailand and Malaysia) after being approached by a buyer (name undisclosed in the press release). In our opinion, Tesco is not desperate to dispose of the Asian operations at the market rate / small premium. Hence, we would not be surprised if an attractive valuation is offered, if the transaction is concluded – at least 1x EV / Sales multiple, pegging the value north of £5bn.
09 Dec 19
Approach received for its Asian jewels.
Tesco has made a brief and surprise Sunday statement, reiterated this morning, that reveals a review of its operations in Malaysia and Thailand, after receiving an approach for the businesses. Tesco also states that the review is at an early stage, no decisions have been taken and that a deal to sell may not transpire (no timeframe for the review has been indicated and in particular whether its outcome involves designate CEO, Ken Murphy).
09 Dec 19
A quantum leap - upgrades
Tesco is well into H2 2020 and appears to be in pretty good shape, in our view. The announcement of Dave Lewis’ pending departure was a surprise, for sure, and no doubt until his replacement, Ken Murphy is in place and understood, there is an additional risk factor of sorts. That said, we expect Chairman, John Allan to have undertaken a diligent selection process and so we await Mr Murphey’s arrival calm and with interest. More broadly, we see Tesco as having a well-set team, executing largely effectively across the board; from grinding out a living in the competitive UK grocery scene to seeing through growth opportunities, particularly in Asia and UK foodservice (Best Food Logistics) whilst a turnaround is in play in Central Europe. Much remains to be done but we can foresee a gently building cash compounder with sound EPS & DPS growth (3-year CAGR FY2019- 2022) of 11.5% and 25.7% respectively, and scope to generate FCF to reduce leverage, provide acquisition optionality and be shareholder friendly. Such ‘stuff’ is the thing of rating appreciation in our view. BUY.
07 Nov 19
H1 results: gaining strength with time; CEO to leave next summer
The H1 performance was better than our expectations – top-line was soft but operating profit outperformed. Management has announced an overhaul of the Polish operations (after scaling down the business). The discount format Jack’s is producing mixed results, although the CEO is optimistic for its future. Dave Lewis will be leaving Tesco next summer (due to personal reasons). Kevin Murphy, whose recent stint was with Walgreens Boots Alliance (as the Executive Vice President and Chief Commercial Officer), will take the helm.
06 Oct 19
Competition mullers FY2018 margins by 50+ bps & returns – but it isn’t going away…
Aldi UK & Ireland (UK&I), noting a c12% share of the latter market, has made comment on its FY2018 financial performance, whilst providing some guide to its future plans in Great Britain. In a nutshell, in FY2018 the German discounter revealed a strong sales performance, manifested in the monthly market updates from the likes of Nielsen, but a notable contraction, some 50+ basis points (bps) as operating margins compressed from 2.62% in FY2017 to 1.74%. Such a contraction in margins is highly notable to us and shows the struggle that Aldi UK&I has had to engage in order to sustain sales and share growth; put another way, it would be material and quite negative news for shareholders if its major competitors were reporting such a fall in trading profits (PTP fell from c£221m in CY2017 to c£182m in CY2018).
16 Sep 19
A quantum of considerable solace
Tesco will report post-IFRS 16 interim results on the 2nd October 2019. In this note we outline our financial expectations for H1 2020, and how that feeds into our FY2020 expectations. Tesco hosted a successful Capital Markets Day (CMD) in June, supported by an effective ESG event, whereby the priorities of the group were set out by CEO Dave Lewis around quantum sales growth, maxing the mix and a focus on costs to drive cash profitability. In doing so, already robust solvency ratios are set to further improve, and the visibility and sustainability of the dividend should positively develop, noting the guidance for 2.0x EPS cover by February 2020. We forecast H1 CPTP of £948m, year-on-year growth of >30%, whilst for the full year, we continue to forecast c12% growth to £2,020m. Large, liquid, defensive and growing, forecast to yield 3.7%, we reiterate our BUY recommendation, noting our forecast for an advancing FCF yield to >7% in FY2021.
02 Sep 19
Carrefour Q2 – Tesco read across
French domiciled Carrefour, subject to its own transformation programme and now in a buying alliance with Tesco^ (TSCO, Buy at 227p), has revealed interim CY2019 results. In line with the new British Prime Minister, the narrative is quite upbeat, the firm either being largely in-line or ahead with its CY2022 change programme; that's where cross-overs with the UK political economy ceases.
26 Jul 19
ASA criticises Aldi UK for misleading shoppers and says do not do it again
To our minds Aldi UK has quite effectively positioned itself as the British shoppers' champion, the agile and cheeky German, the underdog, taking on the big British trade to the consumers' benefit. And it should be said that Aldi UK, and its German discount compatriot Lidl UK, have been hugely disruptive and effective in market share terms in Great Britain over the last decade. Indeed, we would go as far as to say that the limited assortment supermarkets (LASs) have been the prime source of sector disruption. Whilst this is so, we noted with some interest a complaint made by Tesco^ UK to the Advertising Standards Authority (ASA), which took umbridge at a pre-Christmas 2018 basket comparison ran by Aldi UK. The German LAS basically stated that if one swapped to Aldi then one saved. Such matters tend to be part of the rough & tumble of retailing and more often than not, surprisingly it should be said to our minds, brand owners and competitors do not complain about whether or not the shopper is being misled, never mind if the competitive landscape is being distorted.
18 Jul 19
CMD crux: moving in the right direction
Tesco showcased some untapped money-making opportunities in the recently-concluded Capital Markets Day. The focus was on three pillars – Product, Channel and Customer. While some of these were not a surprise, the new opportunities were a welcome sign – boost its presence in Thailand through the convenience format, the concept of Tesco Finest (if implemented) and numerous cost savings steps. No change in the stock recommendation.
26 Jun 19
Positive Capital Markets Day – an iterative data driven revolution
Tesco staged a calm, considered and self-confident Capital Markets Day (CMD) at its relatively recently opened 'Heart' innovation centre on the 18th June. The event centred upon the ‘untapped value opportunities' across the Group, though CEO Dave Lewis advised against adding up all of the opportunities discussed by his team during the day, not least because some will be beaten, some will not be achieved and there is ongoing work underway, considerably beyond what was disclosed. Our key takeaway, therefore, from the visit is that there is a quiet data driven revolution underway at Tesco; where a management team post-recovery is focusing upon pulling a myriad of levers to engineer 'significant opportunities for long-term sustainable competitive growth' through a focus on Customers, Costs and Cash. We reiterate our BUY recommendation.
19 Jun 19
Softer start to FY19
Q1 lfl performance was softer than our expectations. Unfavourable weather and weak non-food sales (general merchandise and clothing) in the UK were the key pain-points. On a positive note, the domestic business once again clocked positive volume. The upcoming stock price triggers would be the Capital Markets Day on 18 June 2019 and Tesco’s ability to cope with Brexit (due in end October 2019). No change to the stock recommendation.
14 Jun 19
FY2020 Q1 trading statement preview.
Tesco is reporting on Q1 trading on Thursday 13th June 2019 ahead of its Capital Markets Day (CMD) due to take place on the 18th June; note an ESG investor day is also set for 26th June. The Group is updating the market following a broadly encouraging FY2019 set of preliminary results, which were released towards the end of April. At that time management was able to record a sound year of progress in the UK, an improving profit performance from Central Europe (CE) and a reversal in the disappointing mood music from Asia, where the Group could have perhaps informed the market more appropriately of the evolving commercial operations in Thailand at the interim stage, which negatively impacted regional earnings. Since then, the UK grocery market has been tougher, as we expected from last year frankly, with the comparatives in May in particular pressurising the industry; we expect those comparatives with the clement April-July period in 2018 to be a feature of the whole industry through this period; Tesco UK's Q1 FY2019 comparative is 2.1% with Booker running at a Palmer & Harvey and Conviviality boosted 14.3%.
11 Jun 19
Strong FY results
Tesco posted a strong performance in Q4 and FY18/19. Key takeaways were a reduction in the lfl decline in Asia, robust sales momentum in the UK, and a strong surge in profitability across all geographies. Retail FCF was a bit softer due to WCR outflow, but it is a non-structural issue. Next stock price trigger could be the Capital Markets Day, scheduled on 18 June 2019. We will increase our estimates, along with a possible upgrade in the stock recommendation.
11 Apr 19
Partnership in Hungary with MediaMarkt
We note with interest an update from the UK retail research house IGD that Tesco has further evolved its retail proposition in Hungary, a key market for the Group in Central Europe. The country's competition authority has approved the acquisition by MediaMarkt of Tesco's electronic goods business in nine of the British retailers 112 stores in the country. Whilst small beer in the big scheme of things, it is another notch in the extended workstreams to improve distinctly sub-optimal returns for Tesco from the region. Central Europe, notably Poland, could be one of a number of recent headwinds that reduce and maybe become tailwinds for the Group in FY2020, which we shall come back to. Tesco has a leading position in the Hungarian grocery market but the Group's network of large hypermarkets have progressively proven to be, as is the case in other markets in the British Isles and Central Europe, the wrong sized store for many shoppers. The concept of the one-stop shop has, therefore, been eclipsed by the return of the specialist, MediaMarkt being a case in point in the electronics segment, and growing penetration of online.
13 Feb 19
A good Christmas for Tesco
Tesco’s ability to regain lfl momentum after a softer Q3 in the UK is noteworthy. However, the company needs to improve the international operations (especially in Poland and Thailand) in order to be re-rated upwards. We have tweaked the earnings estimates but maintain the stock recommendation.
14 Jan 19
It’s done a Duke of York
Tesco's share price has been weak in the back third of CY2018. There is no doubt that the market was deeply concerned and disappointed by the news of Charles Wilson's step down from the Group Board. Additionally, though two further factors seem to have come to play, a step down in UK grocery trading activity levels since the summer (lots of coupons & fuel discounting) and the surprising disappointment of the change in processes in Thailand that led to downgrades for the Asian out-turn. A supposedly more defensive stock has, therefore, been anything but, leading to a notably weak share price. From our perspective if we retain our FY2020 EPS expectations, predicated upon an 3.9% Group trading margin, then we are content to retain our BUY stance. However, it will probably be New Year before we can more aggressively back our financial assertions albeit we reiterate our BUY stance on the Group's stock.
27 Nov 18
H1 mired by weak International business
It was a tough quarter for Tesco. The retailer is likely to remain under pressure in the near term, on the back of the Polish and Thai operations. The South-East Asian country is still lucrative for Tesco (with potential for a performance turnaround in the mid/long-term). However, we would not be surprised if management decides to exit Poland in the coming quarters. We have revised down our earnings estimates, also downgrading the stock recommendation (from Buy to Add).
05 Oct 18
Moving towards the FY2020 margin targets, Asia miss & amortisation changes, interim results.
Dave Lewis, Tesco's CEO, set out a target for trading margins from the Group (ex-Booker) to reach a range of 3.5-4.0% by February 2020, a target that has been the guiding light behind the narrative of Tesco's investment thesis since October 2016, when the business effectively emerged from the remedial measures he had to introduce upon joining the business. Indeed, that target, which no doubt will be dropped or at least not replaced after the April 2020 preliminary results, has been a source of debate with sceptics questioning its delivery and sustainability whilst bulls have suggested that the business, particularly with Booker in-tow, even though the wholesaler has a relatively low return on sales, can sail through the upper end of the range.
03 Oct 18
Another period of margin rebuilding
Tesco will issue H1 FY2019 results on the 3rd October 2018. We anticipate strong progress from the Group as it rebuilds profitability and continues the journey to FY2020 trading margins of 3.5-4.0% (ex-Booker). We expect H1 UK LFL sales of 2.0-2.5%, good sales progress in Ireland, an improving trend in Thailand but challenges in Poland, where Sunday trading has been curtained and stores closed. We forecast H1 CPTP of £868m, (consensus £811m), and EPS of 6.8p so yoy growth of 35%, delivery of which we believe would imply upward pressure on full year expectations (noting the just £16.4m settlement with respect to cyberattacks on Tesco Bank). We forecast FY2019 CPTP of £1,903m (consensus £1,872m), EPS of 14.p, yoy growth of c25%. Trading on 16.2x PER and an EV/EBITDA multiple of 7.5x and forecast to yield 2.1% (with the potential for special returns in the medium term) we reiterate our BUY stance.
01 Oct 18
French supermarkets... Did they or didn't they...? Casino, Carrefour & Tesco...
Quite remarkable goings on have been reported across the English Channel between Carrefour and Casino, seemingly leaving the former somewhat annoyed that the Board of the latter somehow thought a bid has been tabled. Indeed, legal counsel is to be sought to stop innuendo! That can only lead us to assume that Carrefour and Casino have been in talks at some level and that for now they are no longer courting. However, that does not mean they will not dance again, subject to the dance master rules. More broadly, for the record, even with a commercial alliance taking shape, we would be surprised to see Carrefour and Tesco merge even with a seemingly excellent geographic fit across Europe. Meanwhile, ahead of its early October interim results, Tesco Bank may be facing a one-off fine due to the cyber-security attack of 2016 whilst its business in Ireland presses on.
25 Sep 18
Tesco taking the bull by the horns
As expected, Tesco has unveiled its discount store concept today. It will be called as ‘Jack’s’, named after the company’s founder Jack Cohen. The initial details are as follows: 1. This new store is touted to be cheapest in the town. 2. 10-15 new stores will be opened over the next six months. 3. 2,600 products will be sold (vs 20,000 in a typical Tesco store). Out of the total, 1,800 would be Jack’s-branded items. 4. As much as 80% of the products will be grown, reared or made in the UK. 5. Management plans to offer a cashier-less shopping experience (scan and pay using a mobile app) vs self-service machines or traditional check-outs. With this step, the UK’s largest retailer expects to take the fight back to discounters Aldi and Lidl, who jointly command a 13.1% market share today. Notably, the decade-long aggressive expansion by German discounters has long rattled the ‘Big 4’in the UK, which have lost considerable ground during the period. Although we agree that Dave Lewis needs to check the market share erosion (27.4% on 9 September 2018 vs 29.1% in January 2015) – the rampant onslaught from German discounters is the biggest pain-point – this strategy is a bold experiment by Tesco in our opinion. The UK’s largest retailer needs to ensure that this new format does not cannibalise the revenue of its existing stores. The margin of error is also higher as management needs to don multiple hats at the same time – traditional supermarkets vs discount format vs convenience stores vs e-com. The historical failures of other peers also highlights the high implementation risk with this format. Notably, Sainsbury partnered with Netto in 2014 but had to shut these discount stores after incurring losses for two years. In addition to reviving the performance of traditional stores, it is also interesting to see these large retailers treading on different paths as a competitive strategy. Despite an ambitious plan by the CEO, implementation remains the key to success.
19 Sep 18
Q1 results – a slight miss
Tesco reported Q1 FY18/19 results slightly below our estimates – UK & ROI performance came in line, but the international business was a bit weak. Initial progress on the Booker integration is quite satisfactory, aided further by the strategic decision to form a buying alliance with Carrefour and closing an unprofitable non-food website. We have incorporated the Q1 numbers and the impact of some new business events in our estimates. No change to the stock recommendation.
31 Aug 18
Time to hit the road… Jack?
There was much weekend chatter in the UK business press about the forthcoming arrival of Jack’s, a new name to the high street from Tesco. It seems that Jack, should he emerge, will be a LAD (limited assortment discounter) seemingly seeking to compete more head on with the German discounters, albeit Lidl did sponsor England in the World Cup in Russia (if they had sponsored Germany just imagine what would have happened…). We shall await to see if Jack sees the light of day but it does appear that Tesco is indeed moving towards opening a new sub-brand. In this short note we ask some questions around the rational, consistency and potential materiality of such a move. To us there is unlikely to be material downside from Jack’s birth albeit whether he moves the dial for the Group or the wider industry margins remains to be seen. With Jack’s potential arrival ahead, Shore Capital retains its BUY stance on Tesco’s equity.
23 Jul 18
Strong end to FY17/18; Booker integration is valuation accretive
Tesco has continued its positive lfl momentum in Q4. Considering management’s success in the implementation of the turnaround plan, we take a more positive view on the company’s profitability going forward. Booker’s financials have also been integrated into our model. Moreover, the company looks much healthier today considering better than expected working capital management and its ability to reduce pension and debt obligations. Our stock recommendation is reset upwards to ‘Reduce’.
19 Apr 18
UK price war set to intensify as inflation and discounters bite
Sainsbury’s and Wm Morrison plunged c.5% yesterday after Kantar Worldpanel data showed a 20bp market share reduction (on a yoy basis) for both retailers during the 12 weeks ending 3 December 2017. The UK’s second and fourth largest grocers now command 16.3% and 10.6% market share, respectively. Market leader Tesco (-10bp yoy; 28.2% share) was least impacted amongst the UK’s big four as German discounters Aldi and Lidl jointly gained 120bp during the period (together command a 12.0% share). While Tesco clocked 2.5% top-line growth during the period, Sainsbury’s, Morrisons and Asda grew by 2.0%, 1.4% and 1.2%, respectively. The overall supermarket sales growth (+3.1% yoy) trailed grocery inflation (+3.6% yoy), which reached its highest level since 2013 as currency headwinds pushed up import costs.
13 Dec 17
Good Q1 results; consistency is the key
Tesco reported a sixth consecutive quarter of organic growth in Q1 FY17 (trading update). Lfl sales increased by 1% (vs consensus: +1.6%), largely due to strong demand emanating in the UK (+2.3% lfl; 1.6% volume growth in fresh food with a significant market outperformance). However, International sales slumped 3% organically, largely due to the discontinuation of unprofitable bulk-selling activity in Thailand (-0.6% impact on group lfl, -2.7% on International operations and -5.8% on Asia). Reported sales were up 3.6% (vs Q1 FY16: +1.8%); the -0.2% scope impact was more than offset by FX tailwinds (+2.8% yoy). The company continues to implement the £1.5bn cost saving plan. The closure of two depots (Welham Green and Chesterfield) was completed in March and April 2017, respectively. The UK opticians business was sold in April (with efforts focused on the core business) and a new partnership was announced with Dixons Carphone – trial of Curry’s PC World outlets in two of Tesco’s larger stores to repurpose space. Management confirmed no further capital gains tax is payable in Korea and, hence, the currently held provision of £329m will be released. It also remains confident it will outperform the market and keep prices at bay in the remainder of the year.
18 Jul 17
Historical accounting fines pulled down Tesco's profit
Tesco released its FY2016/17 results which showed 2.7% organic sales growth yoy to £55,917m and underlying operating profit of £1,280m, i.e. a 2.3% margin. During this year, Tesco succeeded in enhancing its UK lfl growth, although rather stunted in the Q4. This has sustained its domestic business profitability, improving by 50bp to 1.8% the underlying operating margin. The latter contributed 63% vs. 53% to the group’s underlying operating profit. However, Tesco has taken a total exceptional charge of £235m in respect of the Deferred Prosecution Agreement (DPA) of £129m, the expected costs of the compensation scheme of £85m, and related costs. Thus, the net result came in at £-40m. Net debt decreased to £4.5bn following the lower gross debt and slightly better cash flow generation. However, the balance sheet remains stretched due to the ballooning pension deficit, which more than doubled to £6,621m. It is worth mentioning that the UK defined benefit deficit represents 98% of the group’s deficit. This came after the plunge in bond yields to record lows amidst the deterioration in the UK growth outlook.
12 Apr 17
Booker deal, an attempt to re-inforce Tesco’s Food business
Tesco and Booker, the leading UK food wholesaler, announced that they have reached an agreement on the terms of a recommended share and cash merger. Under these terms, Booker’s shareholders will receive 0.861 New Tesco shares and 42.6p in cash. Based on Tesco share price on 26 January, Booker is valued at £3.7bn. The merger will result in Booker’s shareholders owning 16% of the combined group. The aggregate value of the cash offer is approximately £760m which will be funded from Tesco’s existing cash resources. According to management, the tie-up will create possibilities of £25m extra revenue per annum and £200m in cost synergies by the end of the third year following the completion of the merger (late 2017/ early 2018). Cost synergies will be generated mainly from improved purchasing cost efficiencies and better opportunities in logistics and deliveries. However, this will require a one-off cash cost of £145m in the first three years after the effective date.
01 Feb 17
Struggling outside the modest UK
Lfl growth in the Christmas sales came in at 1.1% across the group and 0.7% in the domestic market vs. 2.9% for Morrisons. Over Q3, sales progressed by 1.5% on a lfl basis and by 6.5% on an actual rate, backed by the international operations (double-digit growth). The latter benefited from the collapse in the pound. Tesco reiterate its EBIT guidance of £1.2bn (slightly higher than our estimated figures).
12 Jan 17
On the right track
THe Q2 figures witnessed a third consecutive lfl positive growth leading to a H1 16 sales improvement of 1.0% on a lfl basis. H1 sales stood at £24.4bn (£27,338m including fuel) following a promising Q2 (0.9% in the UK and 2.1% for international markets). Tesco’s sales have benefited from the increase in both volume and transactions in all markets. All formats – including the largest and the Extra formats – saw an improving trend in lfl sales performance throughout the half. H1 operating profit came in at £596m, i.e. a 2.2% operating margin and management expects £1.2bn for the whole year. This positive trend in the margin will continue according to management and reach 3.5-4.0% by 2019/20. Net debt decreased to £4,352m but total indebtedness surged by £3,400m with a ballooning pension deficit due to low UK bond yields, in the aftermath of Brexit.
05 Oct 16
Ongoing refocus on core business
After three years of decline, Tesco has shown a second consecutive quarter of sales growth in the UK. In its domestic market, sales increased by 0.3% lfl despite the steady challenging environment with continued deflation and stiff competition from the discounters Aldi and Lidl. There was a deflationary impact of c.-0.7% on total UK lfl sales. International lfl sales climbed (+3.0%) due to the positive result from both Asia and Europe, leading to a 0.9% rise on a lfl basis over this Q1 16/17. This positive trend includes a small contribution from new store openings, with total sales growing by 1.1% at constant rates. At actual exchange rates, sales grew by 1.8% including a 0.7% positive foreign exchange translation effect due to the weakening of sterling, principally against European currencies.
28 Jun 16
Net result back in positive territory
Tesco released its FY sales (excluding VAT, including fuel) which showed a decrease of 4.3% to £56,925m. International operations boosted both sales and the operating margin (slight progress to 1.73%). The 52-week sales for the retail division were driven by solid growth in international operations (2.3% lfl), countered by the continuing negative trend in UK sales, albeit an improvement. The FY 2015/16 net result came back into positive territory, having missed last year. Tesco managed to improve its debt profile through strong cash generation (less capex) and the sale of the Korean business (£4.1bn).
13 Apr 16
More people shopped at Tesco this Christmas
Tesco announced a lfl sales improvement of 0.4% for the 19 weeks to 9 January 2016 after a modest Q3 (-0.5% lfl). Volumes and transactions increased by 3.5% and 3.4% respectively, increasing the UK market’s 19W sales by 1.3% lfl. The Christmas performance was also strong in the international business (+4.1% lfl). Having finally restructuring its Central European operations, Tesco is further able to invest for customers and in supporting better availability and improved service. In Asia, the strong growth in customer transactions led to the highest market share in Thailand.
18 Jan 16