ii view: Tesco equipped to overcome Middle East threat

Full-year results to 28 February

• Revenue up 5.4% to £73.71 billion
• Adjusted operating profit up 0.8% to £3.15 billion
• Final dividend of 9.7 pence per share
• Total dividend for the year up 5.8% to 14.5p per share
• Net debt up 11.7% to £10.56 billion

Guidance:

• Expects adjusted operating profit for the year ahead of between £3.0 billion and £3.3 billion
• Expects free cash flow for the current full year of between £1.5 billion and £2.0 billion

Chief Executive Ken Murphy said:

"We are committed to doing whatever we can to help keep down the cost of the weekly shop, and with the conflict in the Middle East creating further uncertainty for consumers and the economy more broadly, that commitment matters more than ever.  

“Over the last year, despite cost pressures from new regulation, we have increased our investments in keeping prices low, further improving quality and offering even better service.

“Our investments have been made possible by our Save to Invest programme, which has delivered over £2.2 billion of savings over the last four years, funding lower prices for customers and higher pay for colleagues.”

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ii round-up:

Started as a market stall in 1919, Tesco today operates over 5,000 stores across the UK, Ireland, Czech Republic, Hungary and Slovakia.

Headquartered in Welwyn Garden City, Hertfordshire, the retailer also owns wholesaling business Booker. Most stores operate under the Tesco brand, although with some, and including outlets run by franchised businesses, operating under the ‘Booker’ and ‘One Stop’ brands.

For a round-up of these latest results announced on 16 April, please click here.

ii view:

Tesco is the largest retailer listed on the UK stock market with a value of £28.5 billion.

Rivals include Sainsbury (J) at £6.8 billion, Marks & Spencer Group at £6.5 billion and Ocado Group at £1.5 billion. UK stores generated most revenue over the past year at 75%, followed by the Booker wholesale at 13.5%, Central European stores 6.5% and the Republic of Ireland 5%.

For investors, rising food prices in the wake of the Middle East war likely generate management caution, with predicted profits for the current financial year of £3-3.3 billion comparing with last year's £3.15 billion. Other costs now include a government tax on packaging. A forecast price/earnings (PE) ratio above the three-year average may suggest the shares are not obviously cheap, while Booker's relatively pedestrian like-for-like sales growth of 0.2% is likely hindered by pressured tobacco demand.

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To the upside, management’s ‘Save to Invest’ programme looks to offer something of a hedge against rising food prices, with further savings of £500 million expected this current financial year. The retailer’s market share of 28.5% remains comfortably ahead of rivals. A relatively recent upgrade of full-year free cash flow of £1.5-2 billion from a previous £1.4-1.8 billion potentially increases the odds of more share buybacks, while a forecast dividend yield of 3.5% continues to offer attraction.

In all, rising energy prices due to the Middle East war are feeding into higher food prices, which could affect sentiment. That said, Tesco’s track record in countering rising costs and a consensus analyst fair value estimate above £5 per share look to offer grounds for optimism for the longer term.  

Positives

• Robust UK market share
• Growth in online sales

Negatives

• Intense industry competition
• Uncertain economic outlook

The average rating of stock market analysts:

Buy