Interactive Investor

Tesco rally reinvigorated by these half-year results

6th October 2021 08:30

Richard Hunter from interactive investor

The UK's largest supermarket chain is bucking the trend today, with the shares racing higher. Our head of markets explains why.

Investors are dancing in the aisles following these half-year results, as a profit upgrade and an ever-strengthening balance sheet provide reasons for cheer at the country's largest supermarket chain.

Tesco (LSE:TSCO) is a cash generating behemoth which, along with the recent sale of its Asian unit, has boosted its financial position further. Quite apart from the 18.5% reduction in net debt, pension contribution comparatives have fallen away after the one-off payment following the sale, while some of the Covid-19 costs are also fading year-on-year.

As a result, Tesco is not only maintaining the dividend which currently yields around 4% and is therefore an investment attraction of itself, but is also instigating a share buyback programme with the first tranche of £500 million due imminently.

This financial largesse is not, however, crimping Tesco’s ability to reinvest in its business, and its strategic priorities should also benefit from the added attention. As an example, while ramping up its online capability during the pandemic, the payback was almost immediate. In these numbers an increase from last year in like-for-like sales of 2.3% is put into true perspective when compared with pre-pandemic levels, since when the growth has exceeded 74%.

The trading numbers across the board are robust, with sales and profits largely driven by an uptick in the performance from Retail, and even Tesco Bank has returned to profit, having previously been blighted by a substantial bad debt provision. Revenues increased by nearly 6% in the 26 weeks ended 28 August, and alongside a reduction in costs, adjusted operating profits spiked by 40.6% and pre-tax profit by 107%.

Tesco has therefore lifted its expectations for full-year profits, notwithstanding the fact that it will continue to invest in the business and that some of the elevated sales numbers may dip slightly in the second half of the year.

Of course, the famously competitive arena in which the company operates will continue to be challenging. Further price wars are possible given the presence of the discounters, which will become increasingly important given wider inflationary concerns and added pressure on consumer spending. At the same time, Tesco is not immune from supply chain issues, although the depth of its supplier relationships is mitigating some of the pain.

Tesco remains the supermarket which its rivals aim to emulate. Its scale and reach are underpinned by a network of large stores and convenience outlets which is now supplemented by an online offering which provides the consumer with an array of choice.

Speculative and actual M&A activity in the sector is also adding froth and, while Tesco is not bombproof from potential approaches, its size may deter most acquirers. Even so, over the last year the share price has added 19%, in line with the rise of the wider FTSE100 over that period, and appetite for the stock is undiminished, with the market consensus of the shares as a strong buy holding firm.

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