An alternative opening gambit to the first-half statement from
Aside from more than doubling trading profit at Tesco bank to £94m (just 6 per cent of the total), profits went into reverse across all of the group's other key divisions. UK trading profits fell 12.4 per cent to £1.11bn, European profits plunged 27.8 per cent to £171m, Asian profits were off 3.8 per cent at £281m and the loss from the US operation deepened slightly to £74m. Overall, underlying pre-tax profit fell 8.5 per cent to £1.8bn, which included a £79m increase in property-related profits, and group trading profits were down over 10 per cent at £1.6bn.
Tesco is experiencing a range of problems across its operations and is yet to clearly demonstrate that the action it is taking to address them is working. The well-chronicled consumer malaise in the UK and Tesco's loss of market share has led to a scaling back of store openings and a £1bn investment in store improvements and promotions. It is very early days and the efforts are yet to have a pronounced effect, with first-half like-for-likes sales, excluding petrol, falling 0.6 per cent, albeit a minuscule 0.2 per cent of growth was eked out in the second quarter.
Tough economic conditions are also the bane for Tesco's European operations, with both the eurozone crisis and austerity measures producing a drag on consumer spending. In Asia, the slowdown in the Chinese economy is clearly hurting, but not as much as new trading hours restrictions in South Korea, which is Tesco's biggest market in the region. The potential hit to profit of this regulatory change is an eye-watering £100m a year.
Broker Panmure Gordon expects full-year adjusted EPS to fall from 36.7p to 33.7p.
|ORD PRICE:||332p||MARKET VALUE:||£26.7bn|
|TOUCH:||331-332||12-MONTH HIGH:||413p||LOW: 295p|
|DIVIDEND YIELD:||4.4%||PE RATIO:||10|
|NET ASSET VALUE*:||217p||NET DEBT:||41%|
|Half-year to 25 Aug||Turnover (£bn)||Pre-tax profit (£bn)||Earnings per share (p)||Dividend per share (p)|
Ex-div: 10 Oct
Payment: 12 Dec
*Includes intangible assets of £4.7bn, or 60p a share
While Tesco's half-year results make unpleasant reading, it's too early to expect to see any major signs of improvement from the all-important UK recovery strategy. The second-quarter improvement in UK like-for-like sales does provide a scrap of encouragement and sales growth has outperformed the industry since June. Exiting the US could provide a short-term fillip but, priced on 10 times EPS forecasts, we continue to rate the shares a hold.
Last IC view: Hold, 301p, 11 Jun 2012