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29 Sep 2021
Making it easy
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Making it easy
Tesco PLC (TSCO:LON) | 295 10.9 1.3% | Mkt Cap: 20,747m
- Published:
29 Sep 2021 -
Author:
Gwynn Andrew AG -
Pages:
25
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...