Tesco Plc

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

The Company will announce interim results on 7 October 2020.

Investment Highlights: Tesco Plc – Buy at GBX 216.70

• The Company increased online capacity, which resulted in higher volumes and business rates relief.
• As per valuation metrics, EV/Sales, Price/Cash Flow and Price/Book Value multiples of the Tesco Plc are currently lower as compared to the corresponding multiples of the Food & Drug Retailing It reflects, shares are undervalued as compared to the industry.
• Tesco Plc has a dividend yield of 4.22 per cent, which is higher than the industry dividend yield of 2.58 per cent. The Company continues to reduce the Debt/Equity ratio from the financial year 2018. The Company has a debt rating of Baa3 from Moody's in May 2020, which is the lowest investment-grade rating and will improve further as the trading environment get clear.

Key Risks

• A changing regulatory environment may adversely affect the activities.
• The Company is exposed to the COVID-19 pandemic, including the closure of retail stores.
• The Company could witness an increase in Future labour cost, which may impact the profitability of the business.

Update on Trading Performance for Q1 (released on 26 June 2020)

• With an increase in sales by 8.2% in the UK and Ireland resulted in a surge in total sales by 8% and 7.9% on an LFL basis.
• The Company managed to increase online capacity significantly to 1.3 million slots per week from 600 thousand slots per week and expects around £2 billion of sales growth in FY2021.
• The sales from the Central European region (except Poland) stood decent with an increase of 3.3% and 3.9% on an LFL basis.
• Tesco Bank witnessed a decline due to reduced activity in money service and banking businesses.

One Year Share Price Chart

Daily Chart as of 3 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Technical Performance

From the technical standpoint, 14-day RSI is currently close to an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology (Illustrative)

Conclusion

The Company has shown a decent increase in online business in the UK, Ireland and Central Europe. In just five weeks, TSCO has doubled the online capacity, which transformed the stores with extensive social distancing measures and supported the most vulnerable customers. Despite the decline in catering and best food logistics sales for the period, the overall sales from Booker’s surged by 6.1%. Tesco bank witnessed lower activity in the Q1 and impacted the profitability. Despite the short-term uncertainty, the bank has solid liquidity and capital ratios.

Meanwhile, supermarkets are formulating plans to increase their delivery slots in anticipation of a rise in online orders for essentials due to the new quarantine regime in place. Moreover, competitive pricing would attract more customers. We believe that online Food & Drug retailers are likely to record strong growth in the near term. The stock made a 52-week low and high of GBX 203.70 and GBX 260.40, respectively.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Buy” recommendation on Tesco at the current market price of GBX 216.70 (as on 3 September 2020, before the market close at 3:48 PM GMT+1) with lower double digit upside potential based on 17.60x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

J Sainsbury Plc

J Sainsbury Plc (LON: SBRY) is an FTSE 100 listed Company, which operates and manages a chain of supermarkets in the United Kingdom. It deals with general merchandise, food, clothing, and financial services.

The Company will announce interim results on 5 November 2020.

Investment Highlights – J Sainsbury Plc – Buy at GBX 182.50

• The Company has shown a strong sales performance from Digital business, with a sales increase of more than twice.
• As per valuation metrics, EV/Sales, Price/Cash Flow and Price/Book Value multiples of the J Sainsbury Plc are currently lower as compared to the corresponding multiples of the Food & Drug Retailing It reflects, shares are undervalued as compared to the industry.
• The Company Debt/Equity ratio for the financial year 2020 stood lower than the industry median and from the financial year 2019 data. The average inventory days are significantly lower than the Industry median. Over the course of 4 years (FY16 – FY20), the company’s revenue surged from GBP 23,506 million in FY16 to GBP 28,993 million in FY20. Compounded annual growth rate (CAGR) stood at 5.38 per cent.

Key Risks

• Any change in the spending pattern of the customer could have a negative impact on the Company’s financial performance.
• There are economic and regulatory uncertainty and a lack of clarity around future trading arrangements through Brexit.
• The adoption of the wrong strategy and failure of apply strategy effectively will impact the operational performance.

Update on Trading performance for Q1 (released on 1 July 2020)

• Driven by strong sales performance from grocery and Argos businesses, the sales from grocery business surged by 10.5%, and general merchandise surged by 7.2% on a year-on-year basis.
• Online sales surged more than double during the period, while clothing sales declined by 26.7% on a year-on-year basis.
• The Company witnessed an increase in retail sales by 8.5% and 8.2% on a like-for-like basis.
• The Company is anticipating an impact of Covid-19 over profitability for the financial year 2021.

One Year Share Price Chart

Daily Chart as of 3 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Technical Performance

From the technical standpoint, 14-day RSI is currently close to an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology (Illustrative)

Conclusion

The Company witnessed an increase in overall sales in the first quarter of the financial year 2021. Moreover, it is progressively pushing sales through the online marketplace. The Company experienced a single-digit percentage of grocery sales growth during the lockdown period, and this growth shall sustain through the first half of 2021. The sales from the clothing business declined but have shown signs of recovery based on successful clearance activity and better stock position.

The Company’s performance was significantly impacted by the covid-19, and with the improvement in the market environment, it is expecting to see some recovery in the near term. The Company has unchanged is guidance for a full-year underlying profit before tax based on improving business scenario but has remained cautious about the sales trajectory. The stock made a 52-week low and high of GBX 171.19 and GBX 236.70, respectively

Based on the decent growth prospects and the valuation done using the above method, we have given a “Buy” recommendation on J Sainsbury at the current market price of GBX 182.50 (as on 3 September 2020, before the market close at 8:32 AM GMT+1) with high single-digit upside potential based on 10.70x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Industry Information have been taken from Refinitiv, Thomson Reuters.

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

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