Tesco's prelims - what the analysts say
Analysts gave Tesco's results a cautious welcome
Tesco said today (20 April) that the company had "weathered" the downturn and booked a 10% rise in annual profits. However, the UK retailer's shares closed down and, while analysts broadly agreed the company delivered a solid performance, they still issued caveats to the group's showing.
Christopher Hogbin, senior retail analyst at Sanford Bernstein:
"Tesco this morning reported 13% growth in group trading profit to GBP3.41bn (US$5.24bn). Although modestly, or 2%, below our expectations, this was offset by higher property profits - resulting in adjusted earnings pershare of 31.7p, just 1% below our expectations.
"Some GBP2.66bn of trading profit in the UK was in-line with our expectations, representing 6.7% growth and a 13 basis points year-on-year margin expansion despite the slowdown in industry growth seen in the second half of Tesco's fiscal year.
"International trading profit was modestly lower than we had expected in each geography, largely driven by lower sales. Asian margins expanded 18bps as the Homever acquisition in Korea swung to profitability. European margins fell 17bps and the US reported £165m loss which management expect will be the "peak loss".
"Tesco's outlook, in our view, highlights the strength of Tesco's broad based growth strategy. We rate Tesco 'outperform' with a GBP5.00 price target."
Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers:
“Tesco has delivered a solid if largely unexciting performance. Revenue and profit growth is broadly in line with analyst expectations, while most importantly, debt has fallen below forecast. Investments made at the depth of the economic crisis continue to be groomed, while the improving backdrop for property assets has largely facilitated the reduction in debt.
"On the downside, sales for the group’s core UK home market remain sluggish, while the lack of current trading figures - unlike last year - fails to reassure. Furthermore, the company remains a long way from leading market positions in the likes of the US and China, with considerable work still to be done.
"In all, despite a broadly progressive performance, the results still leave room for doubt. An international growth strategy continues to set the group apart from arch UK rivals Sainsbury's and Morrisons, while exposure to non-food products and services should provide upside in a sustained economic recovery. Nonetheless, momentum for the group’s core UK food sales has yet to be found, with the result that consensus market opinion has moved from a cautious buy this time last year to a strong hold.”
Nick Bubb, retail analyst at Arden Partners:
"After a sluggish first-half for profits growth, a rebalancing of the interest charge in the second half paved the way for a decent outcome for the year as a whole: at first sight the adjusted profit before tax of just under GBP3.4bn is 10% up on a 52-week basis and the statement is remarkably confident about the outlook. The headline of the press release is “Strong Results, Strong growth to Come” and CEO Terry Leahy is in ebullient form talking to the wires first thing.
"The only caveats we would make are, firstly, that Tesco’s “underlying profit” includes a high element of property disposal profits (of GBP377m) and that, secondly, there is no reference to the recent slowdown in UK sales growth (despite the comment about “running ahead of the industry”). But Tesco does have great strengths in the overseas and services operations and the freehold property backing of GBP34.6bn is a massive underpinning to the market cap and the balance sheet."
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