Tesco: As expected and forewarned,
these final results, to 28th February 2015, are a massive
deck-clearing exercise as new CEO, Dave Lewis, gets stuck in. As we know the
scale of the task is immense. Tesco’s international expansion has been a patchy
success, and that is being very charitable. At home, the hypermarket model has
been undone by a combination of the discounters (mainly Aldi and Lidl), home
delivery, click ‘n’ collect and the rise of the High Street convenience store.
The huge landbank built up over many years now looks wholly unnecessary. The
excess space in the larger stores is a corporate millstone, for which the likes
of Giraffe cafes are only a partial solution.
Dave Lewis’s approach seems to be two-fold. One is to re-energise staff
and customers, which a first positive LFL volume increase in four years seems
to validate. This is at a direct and ongoing cost to the P&L as savings are
ploughed back into the customer offer. Whilst the group’s trading profit fell
58%, it was still a substantial £1.39bn, but only Tesco Bank held its profits
as UK, Asia and Europe all fell back. The second strategy is to protect the
balance sheet, as far as possible, in the face of the various strains. These
numbers included a £4.7bn fixed asset charge impairment, a £0.6bn write-down in
China and over £1bn of ‘stable cleaning’. So, capex is being cut to £1bn this year
from £2bn (which was in turn down 28.2% on FY2014) and the final dividend has
been passed, as previously flagged. The Blinkbox businesses have been cut and
the dunnhumby customer data business is almost certainly going to be put up for
sale. The triennial pension fund valuation has revealed a £2.8bn deficit and
the IAS19 measure is a deficit of £3.9bn, up from £2.6bn a year earlier as bond
yields plummeted. This will be addressed by annual £270m catch up payments,
with the closure of the defined benefit scheme now under consultation. So total
debt (excluding the bank) comes in at £21.7bn, up from £18.6bn. The trading
operations slug of debt at £8.5bn is supported by that reduced £1.39bn of
operating profit, a hairy multiple of some 6.1x. This may be Tesco’s nadir in
fortunes, but they are clearly stretched.
The outlook is for tough trading to continue and the re-investment of operational
savings into the customer offer. So I do not see a sharp rebound in operating
profits, and cashflow will be directed towards the balance sheet. So there
appears to be little prospect of a dividend for now. At 235p, the underlying
diluted eps of 9.4p, without a massive rebound in sight, gives a recovery style
PE of 25x. For now there is no talk of requiring fresh equity, but that cannot
be ruled out if the balance sheet medicine takes effect too slowly. So maybe
the way to look at Tesco is that you get £70bn of sales for an EV of £41bn (mkt
cap £19bn and total debt of £22bn), a successful bank and the largest UK food
retailer. It would be a huge deal, but predators must at least consider limbering
up. So, not a stock for dividend yield (let alone dividend growth), but with so
much bad news in the open and a new board bedding in, an optimist will probably
hang on in there for now. (Neil Cumming, 22nd April 2015)
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 Twitter: @DividendPower
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