Tesco Plc – Operating with Robust Liquidity and Funding Position

FTSE 100-listed Tesco PLC (LON: TSCO) is a United Kingdom-based food & drug retailer Company. The Group serves millions of clients every week through stores as well as online space.

On 7 October 2020, the Company will announce the half-year results for the financial year 2021.

Q1 FY21 Trading Update (for the 13 weeks ended 30 May 2020, as on 26 June 2020)
The Group has stated higher volumes and business rates relief in the first quarter of 2021, due to increasing online capacity. In the 13 weeks ended 30 May 2020, the total sales surged by 8% to £13.38 billion, while the like-for-like (LFL) sales were up by 7.9% year-on-year. This was most pronounced in the UK and Republic of Ireland (ROI), where sales increased to £12.21 billion (up 8.2% LFL increase year on year). Online capacity surged from 600 thousand to 1.3 million slots per week, and the existing sales run rate online indicates approximately £2 billion of sales growth in the financial year 2021. Excluding Poland, the sales from Central Europe increased by 3.3% to £968 million (up 3.9% on an LFL basis). However, Tesco Bank struggled in this period due to reduced activity, and sales decreased to £198 million.

Share Price Performance

 1-Year Chart as on 14 July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Tesco Plc’s shares were trading at GBX 216.00 on 14 July 2020 (before the market close at 9:22 AM GMT+1), up by 0.47% against the last day closing price. Stock 52 week High and Low were GBX 260.40 and GBX 203.70, respectively.

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
 


Key Risks

With a high degree of uncertainty, the impact of COVID-19 crisis will reflect in the financial year 2021. Furthermore, the sector is exposed to political, financial and operational risks, each of which has the potential to impact Company or industry performancesignificantly.

Conclusion

In just five weeks, the Group had doubled the online capacity, which transformed the stores with extensive social distancing measures and supported the most vulnerable customers. For Tesco Bank, the Company made a provision for potential bad debts. Tesco is now forecasting an operating loss for Tesco Bank of £175-£200 million in the financial year 2021. The bank’s liquidity and capital ratios are still strong. Further, Tesco’s recent estimate for incremental costs in the United Kingdom over the financial year 2021 is approximately £840 million.  Overall, the Group is well-placed in the short-term to support colleagues and customers.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance at the current market price of GBX 216.00 (as on 14 July 2020, before the market close at 9:22 AM GMT+1) and will recommend fresh buying at the right time.

Imperial Brands Plc – Operating with Strong Cash Position

FTSE 100-listed Imperial Brands Plc (LON: IMB) is a fast-moving consumer business, with operational interest in a variety of fine cut and smokeless tobaccos, cigarettes, papers, and cigars.

On 17 November 2020, the Company will announce the full-year results for FY20.

Recent News

On 1 July 2020, the Group confirmed the appointment of Stefan Bomhard and Pierre-Jean Sivignon. They have joined the Board as Chief Executive Officer (CEO) and Non-Executive Director, respectively.

Financial Highlights (for the six months ended 31st March 2020, as on 19th May 2020)


(Source: Company Website)

In H1 FY20, the Group showed a decent performance with a strong cash position. Tobacco net revenue was stated at £3.5 billion in H1 FY20, which remained nearly flat against the corresponding period of the last year. The Group strengthened the balance sheet, with the rebased dividend to accelerate debt reduction, focus on cost & cash, renewed RCF (Revolving Credit Facility) and further committed facilities. On a twelve-month basis, the cash conversion was 103%, and it has £445 million working capital inflow in the period.

Share Price Performance


 1-Year Chart as on 14 July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Imperial Brands Plc’s shares were trading at GBX 1,424.00 on 14 July 2020 (before the market close at 9:32 AM GMT+1), up by 1.21% against the last day closing price. Stock 52 week High and Low were GBX 2,256.00 and GBX 1,258.20, respectively.

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 
 


Key Risks
The Company is exposed to unexpected changes in the tobacco-related taxes in key markets, which may be exacerbated by the continuing difficult economic and regulatory environment in many countries.Due to COVID-19 related factors, the Group will have a low single-digit impact on earnings per share in the financial year 2020.

Conclusion
In the current scenario, agreeing on the sale of the premium cigar business for €1.2 billion was a significant achievement. It will further reduce debt and simplify the business. Moreover, the new revolving credit facility will help the Company to operate effectively in the uncertain market environment. Overall, the Company’s prospects look good, and it could be an attractive opportunity to invest in the long term.

The stock stayed sideways after a sharp decrease and the key technical indicators on the short-term timeframe have reversed from the oversold zone, giving a buy signal with positive price pullback in the near term. 
Based on the decent growth prospects and the valuation done using the above method, we have given a “Buy” recommendation at the current market price of GBX 1,424.00 (as on 14 July 2020, before the market close at 9:32 AM GMT+1) with lower double-digit upside potential based on 3.00x EV/NTM Sales (approx.) on FY20E Sales (approx.).
 
*Dividend Yield may vary as per the stock price movement.
*All forecasted figures and Industry information have been taken from Refinitiv, Thomson Reuters.

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