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Tesco sales and government relief offset pandemic costs

The supermarket group's bank plunged into loss
October 7, 2020

It should be clear by now that pandemic-induced panic buying hasn’t translated into big supermarket profits. Tesco’s (TSCO) UK and Irish sales rose by 7.7 per cent and 16.3 per cent, respectively, over its half-year period. This surge, along with £249m in business rates relief, managed to offset £533m in Covid-related costs. Tesco more than doubled its weekly online delivery capacity to 1.5m orders. In comparison, Ocado (OCDO), which last week briefly stole Tesco’s crown as the UK’s most valuable grocer, averaged 345,000 weekly orders in its 13 weeks to 30 August.

IC TIP: Hold at 221p

Strong domestic sales and rates relief helped lift Tesco’s statutory pre-tax profits by nearly a third. But its operating profits fell by 4.5 per cent to £1bn. Add in £30m of exceptional items and amortised acquired intangibles, and you get to management’s £1.04bn headline figure, a 15.6 per cent slump from £1.23bn last year, which then included add-ons of £175m. 

This year’s adjustments include a £105m refund in historic ATM business rates payments following a Supreme Court ruling, which offset £93m in legal costs. Tesco management excludes these numbers from its headline operating profit figure “by virtue of their size and nature in order to reflect management's view of the underlying performance of the group”.

Tesco Bank’s £155m operating loss also dragged down group profits. Customer lending fell 41.2 per cent, while Tesco has also taken an increased charge in anticipation of bad debts. Tesco describes this as a "day one charge" linked to Covid-19 of £194.9m, taking its overall charge for expected credit losses up to £256.6m. Tesco expects its bank to report a full-year loss of up to £200m. 

Tesco’s total debt rose by £982m over the period, which was largely made up of a £742m widening of its pension deficit. It’s just as well, then, that it plans to inject £2.5bn into its UK pension scheme after it sells its Thai and Malaysian businesses, which is expected before the end of the year. The deficit stood at £2.2bn at the end of 2019.

Consensus estimates are for earnings per share of 10.86p in FY2021, rising to 15.36p in the following year.

TESCO (TSCO)    
ORD PRICE:221pMARKET VALUE:£21.6bn
TOUCH:221-221.4p12-MONTH HIGH:260pLOW: 204p
DIVIDEND YIELD:4.4%PE RATIO:21
NET ASSET VALUE:125p*NET DEBT:£12.5bn
Half-year to 29 AugTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201928.54283.042.65
202028.75514.073.20
% change+1+29+34+21
Ex-div:15 Oct   
Payment:27 Nov   
*Includes intangible assets of £5.74bn, or 59p a share