TESCO PLC INVESTMENT FIRST LOOK

Summary

TESCO PLC (LSE: TSCO)

Share Price: £1.85/share. (Down 5% after releasing annual results)

Market Cap.: £15.17bn.

 

The biggest UK grocer released results today showing a net profit of £145m, down from £202m last year.

More concerning is the pension deficits rising from £2.6bn to £5.5bn. Meanwhile, Tesco is pushing forward to buy wholesaler Booker. This move is facing stiff resistance from other shareholders.

The reason for the obstruction is the premium valuation that Tesco has given to Booker PLC. At £3.7bn, Booker would trade at 30 times earnings or 0.8 times sales. (Tesco’s price to sales is closer to 0.2 times)

 

Fundamental Assessment

 

Starting with Tesco’s P&L Accounts, the company had a rough ride, especially 2014/15 when it reported a net loss of £5.664bn.

 Tesco's P&L results

 

Tesco P&L Interim

 

To me and many people, it was a “kitchen-sinking” operation from Dave Lewis. Finance Costs (excluding exceptional) remain high.

Even after two years, Tesco is struggling to regain its heydey of exceeding £1bn in net income. 

Assessing the first-half and second-half turnover, Tesco is steady all year round.

 

Onto its balance sheet,

 Tesco's Assets

 

Tesco's BalanceSheet

Tesco’s Assets have transformed somewhat. The biggest change is the “Investment Property”, where the majority of assets got sold off. Helping to add £2bn to the coffers.  

The grocer goodwill + PPE value fell by £8.4bn to £20.8bn in five years. That helped to drag its shareholders’ equity down to £6.4bn from £16.661bn during the same period.

We shouldn’t sleep on Tesco’s freehold land assets. They still hold close to £13bn.

Despite the drop in net debt to below £4bn, its debt level is £1bn higher from 2012/13. While, total liabilities came in at £39.268bn from £33.186bn, helped by the higher pension deficits.

 

Tesco’s Bank

People should pay close attention because this helped booster its balance sheet.

In the financial period 2012/13, Tesco total loans (both short-term and long-term) to customers were £5.56bn. while customer deposits stood at £6bn.

 Tesco's Bank

Fast forward to today, lending shot up close to £10bn, but deposit rose by £600m to £6.687bn.

Too much lending from Tesco can be problematic if customers can’t repay its loans.

 

P.S. For those who don’t understand the balance sheet of banks. Here is a quick lesson: – When a customer deposits money it becomes a liability to the bank. As the bank lent money out to others, it becomes an asset.

Now, for the cash flow statement.

 Tesco's cash flow

Tesco’s net cash earnings were stable (except 14/15) and the results didn’t look too bad, compared to the 63% fall in share price.

Tesco has reined in capex spending to a £1bn per annum and this is being paid for from its disposal of its assets. That could end if Tesco acquires Booker PLC.

We know that dividends got suspended and will remain so for some time.

Tesco's lease

One thing people criticise Tesco for their lease and leaseback operations. That trade is unwinding slowly, as the company saw total lease shrink. Most of it is due from the disposal of operations. One measure is annual lease over total lease is rising in percentage. It means the average lease duration is closer to the ten-year period.

 

My Opinions

Retailers’ welcome food inflation because they can take price goods higher. The majority of customers accept this situation, as the media plays a role.

Today, the UK grocery market is more competitive than ever. The fight for market share is fierce.

Aldi and Lidl is a threat to Tesco longevity and recovery, as well as the traditional players.

For instance, the Aldi and Lidl threat should scare any investors because of this:

 

 

Now, they command 11.7% of the UK grocery market.

I’ve been bearish of this sector. So, wouldn’t recommend buying any traditional supermarket stock. At the time, the threat from discounters is real. If they carry on achieving “double-digit” sales growth, they will seize more market share faster.

 

Call to Action

This is a new format for giving a company a “first look”, before doing extensive research. The aim is to write below 800 words, but can’t make that promise.

What do you think of Tesco’s results?

 

Disclosure

The opinions expressed by the writer is for entertainment and research purposes. It does not constitute professional investment advice. Data is correct on available information at the time.

Finally, the writer does not own the company’s stock, unless stated otherwise.

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