Tesco - unexpected loss in bagging area

Tesco: When I wrote on Tesco’s in late August, it was already clear that the wheels had come off the trolley, but the flow of bad news continued. There is now a messy debate emerging about whether the former Chief Executive, Philip Clarke placed undue pressure on his executives to pull all the levers possible to pull forward profits in a desperate rear guard action. So now the shiny kitchen sink is out on display and it is pretty full. Deloittes have put a figure of £263m on the profit ‘hole’, similar to the original £250m estimate, but extending back to cover three years. Investors are left with the assumption that the problem doesn’t go any further back in time (which would put Terry Leahy on display). The Chairman Sir Richard Broadbent is stepping down, so the boardroom will soon be refreshed in all key positions.

In these results sales were down 4.4%, with UK like for likes down 4.6%. On squeezed margins the profit figure of £783m was 46.6% down, before all the one offs. Group net cash generation was down to £1bn (from £1.7bn). The balance sheet has been protected to some extent by the swingeing dividend cut (at 1.16p, down 75%), but capex plans have been treated more kindly, coming in at a reduced but still hefty £2.1bn, which will raise eyebrows. The international operations continue to be mixed and further surgery here seems likely. The bright spot was Tesco Bank, with profits up 20% to £102m.

So with the P&L still under internal and external pressure with a balance sheet that is showing signs of stress, so the nadir may be near, but not yet passed. The stress is in net debt that is now £7.5bn and a £3.4bn pension deficit. A rights issue at some point is still quite possible. Given all the uncertainty the board is giving no full year guidance. Being generous and assuming that first half clean eps of 7.7p can be repeated, then 15.4p works out at a PE of 11.0x at 169p. The dividend for the year is likely to be down 75% to 3.69p for a yield of 2.2%, and has an uncertain future. For income growth investors (and many others) this is a share for another day (or year). (Neil Cumming, 24th October)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about.

www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk