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
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
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
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
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
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
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
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
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