Tesco PLC – Robust Liquidity and Funding Position

Tesco Plc (LON: TSCO) is a United Kingdom-based leading retailer company. The group serves millions of clients every week through stores as well as online space.

On 26^th June 2020, the Company will release its 1Q Trading Statement 2020/21.

Recent News

On 2^nd June 2020,the Company said that Chief Financial Officer, Alan Stewart, will retire from his role and the company on 30^th April 2020.

Financial Highlights (for the financial year ending 29 February 2020)

(Source: Annual Report, Company Website)

Before going to the results for FY2020, we would like to update regarding the impact of COVID-19 on the company’s performance. Led by this backdrop, the Company witnessed a resilient performance in the UK region. During the first few weeks of the crisis, the substantial panic buying (30 per cent uplift in the UK) cleared the supply chain of certain items. Whilst the Group has already stepped up the capacity by more than 20 per cent in Grocery Home Shopping. Including fuel sales of GBP 7.4 billion, the Group’s statutory revenue increased by 1.3 per cent to GBP 64.8 billion in FY20, while headline group sales decreased by 0.7 per cent. The group’s operating margin for FY20 increased by 56bps to 4.65 per cent. On a 53-week basis, the diluted EPS and the statutory profit before tax reduced by 26.8 per cent and 18.7 per cent respectively, in the current year. The retail free cash flow increased to GBP 2,063 million in 2020 against GBP 889 million in 2019. Final dividend per share stood at 6.5 pence. On a year-on-year basis, the net debt reduced by GBP 1.1 billion.

Share Price Performance

1-Year Chart as at June-02-2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 2^nd June 2020, before the market close (at 1:38 PM GMT+1), Tesco Plc’s shares were trading at GBX 227.90 and were down by 1.72 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 260.40/GBX 203.70.
Momentum oscillator RSI 14 days on the chart is reflecting an oversold position for the stock and upside bump can be triggered in the near term.

Valuation Methodology


Valuation Metrics

(Source: LSE)

As on 30^th April 2020, the Price to Earnings and EV to EBITDA multiples of TSCO were 17.40x and 7.4x respectively, and the same multiples were lower as compared with the Food & Drug Retailers industry. It is reflecting that the company is trading at a lower multiple and shares are undervalued as compared to its peers.

Conclusion
With a high degree of certainty, the company is expecting the impact of covid-19 crisis will reflect in the financial year 2021. It will led to substantial cost uptick in payroll, distribution and store expenses,the impact on the retail cost lines will be in the range of GBP (650)-GBP (925) million. Tesco Bank is expected to be wedged by a decrease in income from all its activities. The Bank’s capital ratio and liquidity are projected to stay robust. The Group witnessed the potential risk of disruption to activities in light of the proposed sale of the businesses in Malaysia and Thailand. The Group is well-placed in the short-term to support colleagues and customers, and in the long-term, to reinvest into the customer offer.

Based on the decent prospects and support from the valuation as done using the above method, we have given a “HOLD” recommendation at the current price of GBX 227.19 (as on 2^nd June 2020, before the market close at 12:30 PM GMT+1).

WM Morrison Supermarkets PLC - UK’s 4th Largest Supermarket Chain, with Robust Liquidity Position

WM Morrison Supermarkets PLC (LON: MRW) is a United Kingdom-based company, which operates in the retail supermarket stores and associated activities.

On 11^th June 2020, the Company will hold its Annual General Meeting.

COVID-19 and Q1 Sales Update (as on 12^th May 2020)

Overall results reflected an increase of 5.7 per cent in total sales in Q1 despite the highly volatile environment and weak Easter trading due to the continuing lockdown in the United Kingdom. For the 14-week period from 3 February to 10 May, the Group LFL sales was up by 5.7 per cent (excluding fuel), with retail sales increased by 5.1 per cent and wholesale sales surged by 0.6 per cent. As earlier announced, retail contribution to LFL stood at 5 per cent in the first six weeks of the financial year 2021. Sales were flat for the first four weeks of the financial year 2021. For the weeks five to seven in early/mid-March 2020, there was considerable stocking up and lifting sales. The Company had deferred its special dividend pay-out for the financial year 2020, driven by the unprecedented nature of events around Coronavirus.

Share Price Performance

1-Year Chart as at June-02-2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 2^nd June 2020, before the market close (at 2:00 PM GMT+1), WM Morrison Supermarkets Plc’s shares were trading at GBX 185.75 and were down by 1.69 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 210.00/GBX 157.55.

From the technical standpoint, its shares were trading well above its short-term support level of 50-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further. Momentum oscillator RSI 14 days on the chart is reflecting an oversold position for the stock and upside bump can be triggered in the near term.

Valuation Methodology


Valuation Metrics

(Source: London Stock Exchange)

As on 30^th April 2020, the Price to Earnings, EV/EBITDA and Price to Book multiples of the MRW were 12.6x, 7.2x and 1.0x, respectively, and the same multiples were lower as compared with the Food & Drug Retailers industry. It is reflecting that the company’s shares are undervalued based on the above metrics as compared to its peers.

Conclusion
At this current stage, the impact of COVID-19 stays uncertain. The Group continue to monitor various FY21 sales, profit, and cash flow scenarios, but have minimal visibility or certainty around a precise outcome. In 2020, the sales have shown improving trend, despite the challenging circumstances caused by Covid-19 pandemic. WM Morrison had shown decent financial performance during FY20. The like-for-like retail sales grew by 5% so far (first six weeks) in FY20. The company is operating at a robust liquidity position to manage any short-term financial shocks.

Over the 4 years (FY15 - FY19), the company’s revenue surged from GBP 16.8 billion in FY15 to GBP 17.8 billion in FY19. Compounded annual growth rate (CAGR) stood at 1.34 per cent.

Based on the decent prospects and support from the valuation as done using the above method, we have given a “HOLD” recommendation at the current price of GBX 184.80 (as on 2^nd June 2020, before the market close at 8:55 AM GMT+1).
 
*All forecasted figures and Peer information have been taken from Refinitiv (Thomson Reuters).

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.