Tesco PLC

Tesco PLC (LON: TSCO) is a United Kingdom-based leading retailer Company. It serves millions of clients every week through stores as well as online space.

On 14 January 2021, Tesco expects to report its Q3 FY21 trading statement.

Investment Rationale – Buy at GBX 232.30

• From a technical standpoint, 20-Day SMA (215.90) is indicating an upward trend.
• Over the past one year, the stock has outperformed the benchmark index (FTSE 100 with a negative return of ~12.56%) as it has only seen a correction of ~2.47%.
• As per valuation metrics, Price/Earnings, EV/Sales, EV/EBITDA, Price/Cash Flow and Price/Book Value multiples of the Tesco are currently lower as compared to the corresponding multiples of the Consumer Non-Cyclicals sector.
• Over the past four years (FY16 to FY20), revenue has surged at a CAGR of ~4.68%.
• The credit rating agency, Moody’s has maintained a Baa3 long-term rating with a stable outlook.

Risk Assessments

• The Covid-19 pandemic can disrupt the supply chain and can increase the operating and payroll costs.
• The impact of Brexit, macroeconomic uncertainties, foreign exchange fluctuations, and changing consumer habits can threaten the Group's business model, future performance, solvency, or liquidity.
• The banking and money services are likely to remain gloomy in the short-term.

Recent News

6 November 2020: Tesco’s proposed sale of business in Thailand to CP Group has been approved by the Office of Trade Competition Commission.

7 October 2020: Imran Nawaz is appointed as CFO and executive director of Tate & Lyle. He will join the board as CFO in April 2021.

Interim Results - for 26 weeks ended 29 August 2020 (as on 7 October 2020)

 (Source: Company Website)

• During H1 FY21, the Company observed a major shift in customer habit as food sales jumped 9.2% year-on-year and clothing sales declined by 17.2% year-on-year.
• Doubled online delivery capacity to 1.5 million slots a week.
• Brand net promoter score improved by 2 points and Retail EBITDA increased 4.4% year-on-year.
• Net debt reduced to £12.5 billion, declined by £0.1 billion year-on-year.
• The interim dividend was 3.20 pence, representing 35% of last year's full year dividend, which is in line with policy. The interim dividend will be paid on 27 November 2020.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Under Tesco banking business, balance sheet and capital ratios remained strong in FY21, and thus, it expects to report the operating loss of £175-£200 million in FY21. Moreover, Online business increased the capacity from 600 thousand to 1.5 million slots per week. Even in Booker’s business, Tesco is well-positioned to emerge in a strong position. For FY21, Tesco expects the capital expenditure to fall in the range of £0.9 billion to £1.2 billion. The sale of Polish business shall generate net cash proceeds of around £165 million, which is expected for completion in Spring FY21. Further, the Company expects the retail operating profit in FY21 to be at least the same level as FY20. Stock 52 week High and Low were GBX 260.40 and GBX 203.70, respectively.

Based on the factors discussed above, we have given a “Buy” recommendation on Tesco PLC at the current market price of GBX 232.30 (as on 19 November 2020, before the market close at 8.00 AM GMT) with lower double-digit upside potential based 18.27 Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

 

Tate & Lyle PLC – H1 FY21 results demonstrated excellent operational execution, productivity benefits and cost reduction.

Tate & Lyle PLC (LON: TATE) is a FTSE 250 listed, British-headquartered Company, which provides solutions and ingredients for beverage, food, and industrial markets. It operates through three major divisions, namely Food & Beverage Solutions, Sucralose and Primary Products. 

Investment Rationale – Buy at GBX 650.20

• From a technical standpoint, 20-Day SMA (645.90) is reflecting the upward trend.
• As per the valuation metrics, Price/Earnings, Price/Book, Price/ Cash Flow, EV/Sales, and EV/EBITDA multiples of the Tate & Lyle PLC are currently lower as compared to the corresponding multiples of the Food & Tobacco industry.
• In H1 FY21, EBITDA margin and net margin were 19.0% and 9.6%, respectively. Both the ration has remained higher than the industry median for the past for four year.
• Over the past four years (FY16 to FY20), operating profit increased at a CAGR of ~23.56%.
• In H1 FY21, adjusted basic earnings per share increased by 5% to 32.5 pence and adjusted diluted earnings per share were 6% higher against H1 FY20.
• As of 30 September 2020, the Group held undrawn revolving credit facility of US$800 million until 2025 and had access to cash and cash equivalents of £484 million, which reflected robust liquidity.

Risk Assessments

• Failure to develop and commercialise new ingredients can damage business performance and reputation.
• Global disruptive forces (Covid-19, Brexit, Civil Unrest, Climate Change) can impact the demand and supply of products.
• Also, the uncertain market conditions can fluctuate the crop prices, and thus, put pressure over margins. The increase in cyberattack risk can lead to data loss and business disruption.

Interim Results for the six months to 30 September 2020 (as on 5 November 2020)

 (Source: Company Website)

• TATE delivered a robust first-half performance as profit from Food & Beverage Solutions inched higher while the Primary Product division remained steady.
• The strong financial performance was underpinned by excellent operational execution and cost discipline.
• With the agreement to acquire speciality tapioca food starch business, Texturant portfolio has been bolstered.
• The balance sheet also remained solid with access to US$1.4 billion liquidity.
• The net debt to EBITDA ratio stood at 0.7x, while the adjusted free cash flow stood at £194 million.
• The Company also maintained the interim dividend of 8.8 pence.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

TATE expects to report capital expenditure for FY21 to be between £140 million and £160 million. Given the uncertainties, the Company did not issue any other guidance for FY21. However, combined with financial strength and robust product portfolio, the Company shall be able to navigate the uncertain short-term period successfully, and the long-term prospects appear to be strong. Also, it is endeavouring towards business simplification and plans to identify additional savings of US$150 million over a six-year period. Furthermore, it has been partnering with customers to create solutions and ingredients for making healthier and tastier products at affordable prices. It has been targeting low sugar, low calories and fibre enriched food solutions and ingredients. Therefore, it has a high-quality portfolio of ingredients to meet the changing trends and rising demand. Stock 52 week High and Low were GBX 811.40 and GBX 493.83, respectively.

Based on the factors discussed above, we have given a “Buy” recommendation on Tate & Lyle PLC at the current market price of GBX 650.20 (as on 19 November 2020, before the market close at 12.30 PM GMT) with lower double-digit upside potential based 15.30x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

 

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

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

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