Overview

Tesco Plc (TSCO) is a UK based company that is into grocery retail business. The company was incorporated in the year 1919 and is headquartered in Welwyn Garden City, the United Kingdom. The company operates worldwide and the United Kingdom, Ireland, the Czech Republic, Hungary, Poland, Slovakia, Malaysia and Thailand are the major markets. The company is also into retail banking & insurance services. The company serves millions of customers and have more than 6,800 stores globally. The company is the leading retailer has an employee strength of 440,000.
 

Key Statistics

Key Management Team

Mr Dave Lewis; Group Chief Executive & Executive Director

Mr Alan James Harris Stewart; CFO & Executive Director

Mr Charles Wilson; Chief Executive Officer of Booker

Top 10 Shareholders

Schroder Investment Management Ltd.;488.70 million and 4.99%.

Norges Bank Investment Management ;390.95 million and 3.99%.

Majedie Asset Management Ltd.;288.11 million and 2.94%.

The Vanguard Group, Inc.;270.75 million and 2.77%.

Mondrian Investment Partners Ltd.; 252.99 million and 2.58%.

Legal & General Investment Management Ltd.; 249.47 million and 2.55%.

BlackRock Investment Management (UK) Ltd.; 246.35 million and 2.52%.

BlackRock Fund Advisors; 214.02 million and 2.19%.

Artemis Investment Management LLP;180.50 million and 1.84%.

Invesco Asset Management Ltd.;179.66 million and 1.83%.
 

Swot Analysis
Strengths
The company has a strong market presence and ensure easy accessibility of its products. It operates worldwide and has more than 6,800 stores.
The company’s strong financial position helps the firm to make further investments and expansion.
Weaknesses.
The company’s majority of revenue is coming from the UK and Europe. The company has not utilised its resources properly in other markets, e.g. Asia and Central Europe etc.
Opportunities
The company can explore the other markets which are not performing that well. With the help of proper resource utilisation and market analysis, the company can turn its underperforming markets into profitable markets.
Threats
The company holds multiple licenses to operate in different regions. The significant risk for the company is to maintain worldwide legal and regulatory compliance. Stiff competition from the local players in the underdeveloped market may act as a hurdle and might not let them operate well.
 

Financial Results and Review – H1 FY2019 (£, million)

(Source: Interim Report, Company Website)

Financial Commentary – H1 FY2019

The company reported revenue of £31,734 million for the H1 ending for the Financial Year 2019 as compared to £28,339 million in H1 financial year 2018. There was an increase of 12 per cent in revenue, due to an increase in sales of UK & ROI segment of the company. The company’s reported operating profit before exceptional items & amortisation had increased in comparison with the last year mainly due to the inclusion of Booker profit of £97 million in the H1 FY2019. The company’s statutory profit before tax was increased to £564 million in H1 FY2019 as compared to £553 million in H1 FY2018, giving an increase of 2 per cent as compared to last year. The company’s Dividend per share was increased by 67 per cent from 1.00p in H1 FY 2018 to 1.67p in H1 FY2019 due to on track delivery of c.2.0x EPS cover in the medium-term. The company displayed ability to generate cash flow of £1.1 billion from retail operations in H1 FY2019.

Ratios  

(Source: Thomson Reuters)

Ratios Commentary

Gross margin reported was 6.10 per cent in the first half of financial year 2019, reflecting an increase of 0.5 per cent when compared with last year data. However, the reported margin was relatively lower than the industry median. EBITDA margin of 5 per cent for the H1 financial year 2019 stood marginally higher when compared with last year data. However, the reported margin is equal to an industry median of 5 per cent. Net margin reported was 1.3 per cent in the H1 of financial year 2019, reflecting a decrease of 0.2 per cent when compared with last year data. Return on equity stood at 3.40 per cent which was lower than the industry median of 5.10 per cent. At liquidity front, Tesco Plc’s current ratio was lower than the industry median of 0.88, reflecting a lack of sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio was significantly higher as compared to the industry median, reflecting that the company is more leveraged as compared to its peers.

Share Performance

(Source: Thomson Reuters)

On 1st March 2019, Tesco Plc shares closed at GBX 229.30 up by 1.46 per cent against its previous day closing price. Stock’s 52 weeks High and Low is GBX266.80/GBX187.05. At the closing price, the share was trading 14.06 per cent lower than its 52w High and 22.59 per cent higher than its 52w low. From the previous three months, Tesco Plc share price was up by 16.07 per cent, and in the last one year, the stock has delivered a 9.92 per cent returns. Stock’s average traded volume for 5 days was 21,855,781.20; 30 days - 19,603,993.80 and 90 days - 22,311,322.66. The average traded volume for 5 days was up by 11.49 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 16.3x which was the same as the industry median. The company’s stock beta was 1.14, reflecting higher volatility as compared to the benchmark index. Total outstanding market capitalisation was around £22.56 billion and a dividend yield of 1.60 per cent.
 

Valuation Methodology – 1

EV/Sales Multiple Approach (NTM)

While valuing Tesco PLC on EV/Sales Multiple, we have considered Next Twelve Month (NTM) EV/Sales of its peers, which were Koninklijke Ahold Delhaize NV (NTM EV/Sales stood at 0.49x), Carrefour SA (NTM EV/Sales stood at 0.35x), Ocado Group PLC (NTM EV/Sales stood at 4.45x), WM Morrison Supermarkets PLC (NTM EV/Sales stood at 0.37x), and Casino Guichard Perrachon SA (NTM EV/Sales stood at 0.45x).
 

Valuation Methodology – 2

EV/EBITDA Multiple Approach (NTM) (EBITDA (FY19E) approximately))

While valuing Tesco PLC on EV/EBITDA Multiple, we have considered Next Twelve Month (NTM) EV/EBITDA of its peers, which were Koninklijke Ahold Delhaize NV (NTM EV/EBITDA stood at 6.77x), Carrefour SA (NTM EV/EBITDA stood at 7.48x), Ocado Group PLC (NTM EV/EBITDA stood at 81.54x), WM Morrison Supermarkets PLC (NTM EV/EBITDA stood at 7.1x), and Casino Guichard Perrachon SA (NTM EV/EBITDA stood at 9.19x).

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Growth Prospects and Risks Assessments

The company is giving more emphasis on innovation. The company has relaunched many of its products as a part of to 100 years celebration. It is using a cost-effective measure to operate more effectively. The significant risk for the company is to maintain worldwide legal and regulatory compliance.
The company’s performance can be impacted by macroeconomic conditions and changes such as inflation or public spending.

Conclusion

While broad-based challenges can be seen ahead of the group, given the current trading levels which indicate the stock movement towards 52-week high with support coming from growth drivers like increased revenue mainly because of increased overseas sales and adjusted operating profit. Based on the strong growth prospects of the company and the valuation done using the above two methods we have given a BUY recommendation with single-digit upside potential (based on 7.48x NTM EV/EBITDA on FY19E EBITDA and 0.41x NTM EV/Sales on FY19E sales).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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