Tesco PLC

Tesco PLC (TSCO) is a United Kingdom-based retail company and is one of the largest retailers of consumer goods in the world, serving millions of customers every week through stores as well as online space. While the group also offers insurance and retail banking services, it mainly operates as a retailer of grocery products. The operations of the group are differentiated in two operating segments, namely Retail and Tesco Bank. The Retail division is further divided into three geographical segments: UK & ROI, Asia and Central Europe.

On 2^nd October 2019, the company will announce the interim results of the financial year 2020.

Recent News
On 3^rd September 2019, Lloyds Banking Group has agreed to buy Tesco Bank’s mortgage book in a £3.8 billion deal, after a vicious price war led the latter to abandon the mortgage market. Tesco Bank has more than 23 thousand mortgage clients.

Trading Update (as on 13^th June 2019)
In the first quarter of the financial year 2020, on a constant rate basis, the company’s total reported revenue rose by 0.4% to £13,978 million as compared to the corresponding period of last year. Revenue increased by 1.3% to £11,168 million versus the previous year in the UK & ROI segment. In central Europe, revenue declined by 7.9% to £1,296 million, mainly because of store closures. In Asia segment, revenue grew by 2.6% to £1,244 million against the corresponding period last year, driven by the growth in the Bangkok area. In Tesco bank segment, sales declined by 1.9% to £270 million.

Financial Highlights (FY2019, £million)

(Source: Annual Report, Company Website)

As like-for-like sales in the UK and the Republic of Ireland (ROI) grew by 2.9%,group sales rose by 11.3% at constant exchange rates with like-for-like growth of 1.4% to £56.9bn, up from £51.0bn in FY 2018, while statutory revenue of £63.9bn grew by 11.2% year-on-year. Helped by cost savings programme and further simplification of operations, UK & ROI operating profit was up by 45.1% to £1,537m, leading to a group’s operating profit of £2,206m, up 34.0% at actual rates and up 33.5% at constant exchange rates. Statutory operating profit rose by 17.1% year-on-year to £2,153m, against £1,839m in FY18. Statutory profit before tax was reported at £1,674m, up by 28.8%, while profit/(loss) after tax for the year was £1,320m. Statutory basic earnings per share from continuing and discontinued operations were 13.65p, up by 12.3% year-on-year. Taking the total dividend for the year to 5.77p, up 92.3% year-on-year, the company proposed a final dividend of 4.10p per ordinary share.

Share Price Performance

Daily Chart as at September-05-19, before the market closed (Source: Thomson Reuters)

On 5^th September 2019, at the time of writing (before the market close, GMT 1:08 AM), Tesco PLC shares were trading at GBX 229.60 and increased by 0.92% against the previous day closing price. Stock's 52 weeks High and Low are GBX 254.10/GBX 187.05.

Valuation Methodology


Conclusion
In the first quarter, the group grew ahead of the UK market, reporting a strong start to the year as the group was helped by more competitive customer offer. The group also seeks to improve its operating margins to be in between 3.5% and 4.0% by 2019/20 by improving the mix across geographies, channels and product, and achieve the remaining goals in its turnaround plan in 2019/20.

The group has continuously improved the quality and value of service and offers and is well-positioned to deliver strong, sustainable returns. The company is placing an increasing focus on growth in free cash flow 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.
Based on the above factors and supported by valuation done using the above method, we have given a “Hold” recommendation at the closing price of GBX 227.50 (as on 4th September 2019), based on 14x NTM Price/Earnings multiple (approx.) on FY20E earnings per share (approx.).

IQE Plc

IQE Plc (IQE) is a United Kingdom-based (Cardiff) designer & manufacturer of advanced semiconductor wafer products. The company is regarded as a leading global supplier of advanced wafer products and wafer services, providing a world-class platform with a global footprint spanning Europe, Asia and the USA. The company’s products are used for a wide range of high-tech applications, catering to a diverse range of markets including LEDs and advanced electronics, power switching, CPV (advanced solar), InfraRed, photonics, and wireless. The group’s operations are differentiated in four operating segments: Wireless, Photonics, Infra-red and CMOS++. It has a headcount of more than 650 people.

Recent News
The company has announced its half-yearly results for the period ended 30th June 2019, i.e. 3rd September 2019.

Financial highlights for H1 FY19 period ended 30^th June 2019

(Source: Interim Report, Company Website)

The company’s revenue plunged by 9 per cent YoY to £66.7 million in H1 FY19as against £73.4 million in H1 FY18. This can be attributed to a weak market for smartphones and reduced demand with respect to a slowdown in the technology market coupled with tensions in the international trade. The company’s adjusted EBITDA was recorded at £7.4 million in H1 FY19as against £13.5 million in H1 FY18. The company’s operating loss (adjusted) was recorded at £1.9 million in H1 FY19 as against a profit of £7.6 million in H1 FY18. This can be attributed to negative operating leverage and increased capacity, which results in increased depreciation and amortisation to the tune of £2.4 million. The company’s LBT (loss before tax) was recorded at £3.7 million in H1 FY19 as against a profit of £6.6 million in H1 FY18. The company had an adjusted diluted loss per share, recorded at 1.29 pence during the period, which can be attributed majorly to the operating loss incurred by the company. The company’s capital investment on property, plant and equipment was recorded at £19.1 million in H1 FY19 as against £19.4 million in H1 FY18.

Share Price Performance

Daily Chart as at 5^th September 19, before the market close (Source: Thomson Reuters)


On 5^th September 2019, IQE Plc shares were trading at GBX 49.40 at the time of writing before the market close (at 1:22 PM GMT), dipped by 1.29 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 99.84/GBX 41.32. The group’s stock is reflecting lower volatility as against the benchmark index based on the company’s beta of 0.55.

Valuation Methodology

*Peers: Kainos Group Plc, SDL Plc, GB Group Plc and Learning Technologies Group Plc.

Conclusion
There are some key factors which will impact the revenue growth for the company in FY19. For instance, the geopolitical landscape uncertainty which hampers the confidence in production with respect to technology markets. The company’s EBITDA margins are expected to be on the lower side in the financial year 2019 due to low utilisation of the facilities with respect to their capacities. The company has reiterated its revenue guidance for the full year to £160 million.

The company’s revenue generation in the second half will form a more than 50 per cent part of the full-year revenues. Given the fact that the company has a fixed cost base now, operating profitability is expected in the remaining half year, which will be supported by cost efficiencies. In addition, the company has reiterated its guidance on capital investment to £40 million from £30 million as stated earlier.
The company is expecting its Photonics and Wireless business will perform well in the second half of the FY19 and into FY20. The group is planning to expand its capacity in Massachusetts and Taiwan regions.
Based on the above rationale and risk associated, we have given a “HOLD” recommendation at the closing price of GBX 50.05 (as on 4^th September 2019), based on the 46.00x NTM Peers Price/Cash Flow Value (approx.) on FY19E cash flow per share (approx.).
 
*All forecasted figures and peers have been taken from Thomson Reuters.

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