Tesco PLC

Tesco PLC (LON: TSCO) is a FTSE 100 listed retailer with multinational operations. It serves customers with healthy, affordable, and sustainable food items. Geographically, the Company bifurcates its operations into segments – UK & ROI and Central Europe. The UK & ROI operation comprises Tesco UK, Tesco Ireland, and Booker. Adjacently, Central Europe operation includes Tesco Czech Republic, Tesco Hungary, and Tesco Slovakia.

Upcoming Events

• On 25 June 2021, Tesco has scheduled its annual general meeting.
• On 2 July 2021, the Company is likely to pay the final dividend of 5.95 pence to the shareholders.
• On 6 October 2021, Tesco has scheduled to release its interim results for H1 FY22.

Growth Prospects

• Market Share: Tesco is a competitive player in the market, which has also maintained high customer satisfaction. The Group expects to drive long-term profitable growth through sales and not just costs. Tesco also strengthened its brand portfolio and gained market share during FY21. It also improved value perception with increased customer satisfaction.
• Cost & Capital Discipline: During FY21, Tesco reported a significant decline in net debt and total indebtedness, which shows that the Group has a rigorous focus on returns and overall capital spend broadly remained in the right place.
• Shareholder Return: Despite the Covid-19 uncertainties, the Group maintained a payout ratio of 50% of earnings and maintained the FY21 dividend in line with FY20. In February 2021, the Group also returned £5.0 billion through a special dividend, following the sale of its Thailand and Malaysia business.

Risk Assessment

• Emerging Risks: Brexit’s policy can lead to high-cost inflation, which can eventually impact the product’s pricing. Similarly, the prolonged impacted of the Covid-19 pandemic has disrupted the supply chain and leading to labour shortages as well. Moreover, macroeconomic instabilities can impact customers’ budget. Amidst the challenging market conditions, Tesco Bank is also exposed to liquidity, credit, and operational risk.
• Principal Risks: Tesco operates in an industry that faced intense competition that can lead to a loss of market share and profitability. Also, there are rising concerns pertinent to climate risk and data privacy. The Group is also exposed to strict regulatory guidance regarding safety standards, failure of which can lead to significant reputational damage.
  

Now we will analyse some key fundamental and shareholders statistics of Tesco PLC.

Recent News

• Purchasing Alliance: On 7 June 2021, Tesco announced that it has decided not to extend the Purchasing Alliance (operational framework ending on 31 December 2021) with Carrefour, as the Company has decided to work independently and focus on its own opportunities.
• Disposal: On 16 March 2021, Tesco completed the disposal of its Poland business (Tesco Polska) to Salling Group A/S. As the transition period can take up to 18 months, Poland-based Tesco stores will be converted to Netto.

Quarterly Results (for the 13 weeks ended 29 May 2021, as on 18 June 2021)

 (Source; Company Website)

• As shown in the image above, UK business continued strong performance and two year like-for-like sales grew 9.3%, driven by the benefit of customers consuming more products amid stay-at-home orders.
• Similarly, the UK online demand remained robust at 1.3 million orders per week.
• The like-for-like sales for catering and retail services recovered strongly, supported by reopening of hospitality sectors.
• Tesco Bank reported a 10.1% sales decline in Q1 FY22, on year-on-year basis.
• Despite the uncertain market outlook, guidance from April 2021 remained unchanged.

Financial Highlights (for the 52 weeks ended 27 February 2021, as on 14 April 2021)

(Source: Company Website)

• During FY21, Tesco’s like-for-like sales grew +6.3%, while the UK sales surged 7.7% year-on-year.
• Tesco reported that its online sales in the UK jumped 77% year-on-year in FY21, while the Company’s capacity reached 1.5 million slots per week.
• Due to the increased discount rate, Tesco Bank reported an operating loss of £175 million, in line with guidance.
• As of FY21, net debt was reduced by £0.3 billion to £12.0 billion, while the total indebtedness also reduced by £1.9 billion.
• Tesco announced the full-year dividend of 9.15 pence in FY21, with a final dividend of 5.95 pence, which was in line with FY20, reflecting the Board the confidence in future cash flows.

Financial Ratios (FY21)

 Share Price Performance Analysis

   (Analysis done by Kalkine Group)

On 21 June 2021, at 9:30 AM GMT, Tesco PLC’s shares were trading at GBX 224.85, up by 1.40% against the previous day closing price. The stock made a 52-week High and Low of GBX 250.33 and GBX 201.71, respectively.

TSCO’s stock price is hovering around the lower standard deviation of the Bollinger Bands. Meanwhile, the momentum indicator 14-day RSI (45.29) is also trading around the oversold levels. Moreover, the MACD line also trades above the centreline but forms a negative crossover with the signal line.

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative) 

Business Outlook Scenario

Tesco demonstrated a strong operating performance in Q1 FY22 and the profit guidance remained unchanged. In FY22, the Group expects a strong recovery in profitability with additional sales volume arising from lockdown easing and saving in non-recurring cost incurred for the pandemic in FY21.  Even Tesco Bank is anticipating a return to profitability in FY22, though the pace of recovery is highly dependent upon economic conditions. Adjacently, the three major credit rating agencies (Moody’s, S&P, and Fitch) has sustained a stable outlook on the long-term rating. Moreover, the Group has strengthened its brand portfolio, improved value perception and customer satisfaction, to maintain its market share. In a nutshell, Tesco remained committed to returning excess capital to shareholders and maintained sound capital discipline.

 (Source; Company Presentation)

Based on the robust cash returns to shareholders, strong online growth, resilient balance sheet, stable margins, with support from the valuation as done using the above method, we have given a “BUY” recommendation on Tesco PLC at the current market price of GBX 224.85 (as on 21 June 2021 at 9:30 AM GMT) with lower double-digit upside potential based on 15.13x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

*All forecasted figures and Industry Information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV.

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