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Tesco doubters dominate argument

Despite respectable headline figures, the grocer is struggling to convince the market about its future plans
April 13, 2017

Tesco (TSCO) boss Dave Lewis is on a mission to shore up confidence in the supermarket's long-term recovery plan. The strategy to rebuild the grocer's margins inspired a significant re-rating in the company's share price last year, but the stock has slipped back since the start of 2017.

IC TIP: Hold at 189.5p

Tesco's proposed takeover of wholesaler Booker (BOK) has been seen by some analysts and shareholders as a distraction from the task at hand, while the 2014 accounting scandal continues to haunt. Case in point: pre-tax profits of £145m for the 2017 financial year were down more than a quarter (see table), largely thanks to a £235m charge in relation to the regulatory settlement and the related compensation scheme. Restructuring and redundancy costs added another £199m to the bill, although £165m earned from various property disposals helped offset this.

Unsurprisingly, company executives are keen to focus on other figures. The group reported its first positive year of like-for-like sales growth for seven years which, along with a close eye on costs and subsequently better margins, allowed adjusted operating profits to break through the £1bn mark, rising by 30 per cent at actual exchange rates. Group operating margins have widened from 1.8 per cent to 2.3 per cent, leaving the company on track to achieve its target of between 3.5 per cent and 4 per cent by the 2020 financial year.

Mr Lewis credits a number of factors including putting the customer "back at the heart of what we do". That means improving product ranges - it has invested £300m in fresh food - changing the sales mix and trimming £226m-worth of costs, against a £1.5bn medium-term target. Prices have also stayed relatively stable despite wider inflation in the sector, something Mr Lewis believes can continue as volume growth gives the company wiggle room.

Analysts at Shore Capital expect adjusted pre-tax profits of £987m for the year ending February 2018, giving EPS of 9.3p, compared with £842m and 8.1p in FY2017.

TESCO (TSCO)

ORD PRICE:189.5pMARKET VALUE:£15.5bn
TOUCH:189.5-189.6p12-MONTH HIGH:219pLOW: 143p
DIVIDEND YIELD:nilPE RATIO:234
NET ASSET VALUE:79p*NET DEBT:58%

Year to 28 FebTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201363.42.100.414.8
201463.62.3012.114.8
201556.9-6.30-69.61.2
201653.90.203.2nil
201755.90.150.8nil
% change+4-28-75-

Ex-div: na

Payment: na

*Includes intangible assets of £2.7bn, or 33p a share