Tesco

Tesco PLC (TSCO) is a British retail company and is one of the world's largest retailers of consumer goods. The group primarily operates as a grocery retailer but also provides insurance and retail banking services. Operations are primarily differentiated in two operating divisions: Retail, which includes retailing and associated activities, and Tesco Bank, which comprises of banking and insurance services. The Retail division is further divided into three geographical segments: UK & ROI, Central Europe and Asia. In the first half of FY 2019, the group reported an increase in revenue for the 11^th consecutive quarter. Post hitting its 52-week low in October 2018, since the start of the year, the company has witnessed an uptrend in its price.

Key Financial Highlights -1H FY 2019
 
(Source: Company Filings)

The group's statutory sales rose by 12% in the first half of FY 2019 to £31,734 million as compared to £28,339 million in H1 FY 2018. Headline Group sales, at constant exchange rates, increased by 12.5% to £28.3 billion, driven by strengthening of sales in UK & ROI. The company's operating profit before exceptional items & amortisation increased to £933 million, rising by 23.9%, indicating the cost savings programme is progressing well in the UK. The company's statutory profit before tax increased to £564 million in H1 FY2019, while headline diluted EPS rose by 18.4% (actual rates) to 6.36p, due to stronger profit performance. The interim dividend per share increased by 67 per cent to 1.67p in H1 FY 2019, and the company is on track to deliver c.2.0x EPS cover in the medium-term.

Valuation Methodology
Method: EV/EBITDA Multiple Approach (NTM)


Share Price Commentary

Daily Chart as at April-09-19, before the market closed (Source: Thomson Reuters) 

On 9^th April 2019, at the time of writing (before the market closed, at GMT 11:50 am), TSCO shares were trading at GBX 237.47, down by 0.25 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 266.8/GBX 187.05. The company’s stock beta was 1.15, reflecting higher volatility as compared to the benchmark index. The outstanding market capitalisation was around £23.26 billion and a dividend yield of 1.54 per cent.

Conclusion
The group has continuously improved the quality and value of service and offers and is well positioned to deliver strong, sustainable returns. The company remains on target to reach its medium-term aim of reducing cost by £1.5 billion; savings of £1.1 billion to date has been achieved. The group also seeks to improve its operating margins in between 3.5% and 4.0% by 2019/20 by improving the mix across geographies, channels and products. The company is placing an increasing focus on growth in free cash flow and earnings and continues to strengthen its balance sheet. However, the company continues to face increasing risk from changing competitive landscape and price pressures across most of its markets. Moreover, the populism wave across the world has resulted in an increased risk of a push towards greater regulation of foreign investors and a favouring of local companies, which can limit the company's presence in emerging markets. Based on strong growth prospects and supported by the valuation done using the above method, we have given a BUY recommendation at the closing price of GBX 238.00 (as on 8th April 2019) with single-digit upside potential based on 8.0x NTM EV/EBITDA (approx.) on FY19E EBITDA.
 

J Sainsbury’s

J Sainsbury's PLC (Ticker symbol: SBRY) is a British chain of supermarkets, operating primarily in the United Kingdom. The company engages in grocery-related retailing and retail banking with interests in property as well. The company's brands include Sainsbury's groceries, Argos, Tu, Sainsbury's Home, Habitat and Sainsbury's Bank. The group's operations are differentiated into four operating segments: Retail – Food, General Merchandise and Clothing, Financial Services & Property Investment. The proposed merger with Asda has taken a toll on the stock as the agreement has still not been rectified by the regulatory body, with the risk of merger not getting approved.

Recent Developments
In April 2018, the grocery giant announced an agreement to buy its competitor, Asda, the UK arm of Walmart. The merged company will overtake the current market leader to become the UK's biggest supermarket chain. However, the UK's competition regulator, Competition and Markets Authority (CMA), has said at it could block the acquisition or may ask the brand to sell numerous stores as consumers might have to face lower choices and higher prices due to the merger. In a statement released on 19th March 2019, the company refuted the allegations and reiterated that the proposed merger would create significant cost savings which would allow the company to lower prices.

Key Financial Highlights (1H FY 2019, in £m)

(Source: Company Filings)
 
Underlying Group sales increased by 3.5 per cent over the last year to reach £16,884 million, boosted by increased sales of food and general merchandise which was in turn helped by the high temperature in the summers. The retail underlying operating profit rose by 23.2 per cent to £335 million in H1 FY 2019, while the underlying profit before tax was up by 20.3 per cent over the last year to £302 million, driven by synergies and reduced interests costs along with a reliable food performance. The underlying basic earnings per share increased by 18.4 per cent over the previous year to 10.3p. The interim dividend of 3.1 per share was announced, in line with the company's policy of announcing 30 per cent of the full dividend paid in the prior year.

Valuation Methodology
Method: Price/Earnings Multiple Approach (NTM)


Share Price Commentary
 
Daily Chart as at Mar-29-19, before the market closed (Source: Thomson Reuters) 

On 9th April 2019, at the time of writing (before the market closed, at GMT 12:30 pm), SBRY shares were trading at GBX 235.43, down by 0.38 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 341.8/GBX 221.90. The company's stock beta was 1.04, reflecting the same directional movement of stock with the index. The outstanding market capitalisation was around £5.21 billion and a dividend yield of 3.81 per cent.

Conclusion
The company is on track to meet the market consensus for a full-year profit of £634 million and is expected to deliver at least £500 million of cost savings in next 3 years. The growing cost-cutting along with simplification of the structure has led to enhanced efficiencies. This, coupled with the company's focus on synergies from Argos, has resulted in strong financial performance. Keeping up-to-date with the trend, the company is increasingly pushing into the online marketplace, which has been growing at an impressive pace. However, the acquisition of Asda is still under regulators' purview, and any adverse decision will affect the company's financials and future price. Moreover, the grocery, clothing and general merchandise markets remained a very competitive and marketing-centred industry, straining the margins. Fluctuations in commodity and foreign currency rates can increase input costs which the group may not be able to pass on to the consumers. Based on healthy prospects, strong financials and supported by valuation done using the above method, we have given a BUY recommendation at the closing price of GBX 236.4 (as on 8th April 2019) with low double-digit upside potential based on 20.45x NTM Price/Earnings (approx.) on FY19E earnings per share.
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.
*The buy recommendation is valid for the current price as covered in the report (as on April-09-19).

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