Tesco Shares Undervalued say Analysts

Supermarket stock Tesco saw shares jump 6% yesterday following positive results, but equity analysts say the share price is still undervalued

Ioannis Pontikis 12 April, 2018 | 8:52AM
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Tesco stock is undervalued say analysts food supermarket equities UK retail retailer

Tesco (TSCO) saw shares jump 6% yesterday after revealing sales were up 2.3%, but Morningstar equity analysts say shares remain slightly below their £2.30 fair value estimate.

The supermarket reported preliminary fiscal 2018 results for the 52 weeks to February 24, 2018, with sales growth in line with analyst estimates.

There are two main takeaways we keep out of this earnings announcement. The first is a reiteration of management's medium-term goals; £1.5 billion cost savings, 3.5%-4% earnings before tax margin by fiscal 2020, as well as Booker synergies targets; £200 million gross synergies by 2021, which we view as attainable. Second, the disclosure of a £2.5 billion incremental sales aspiration that the Tesco-Booker entity could achieve on top of the identified revenue synergies.

In the UK & Ireland segment, 2.3% like-for-like growth was driven both by a higher number of customers and a larger basket, but most importantly a continuation of food volume market outperformance and healthy like-for-like growth across channels including large stores . Cost savings of £404 million were again the largest driver behind the 50-basis-point margin improvement, compensating for high cost inflation.

In the Central Europe region, like-for-like sales were up 0.3%, with fresh food sales up 1.2%, while declines in general merchandise and clothing sales contributed negatively to growth. Efforts to reduce costs and improve stock management, including a new distribution centre in Slovakia, resulted in an 87-basis-point operating margin improvement to 1.8%.

Turning to Asia, like-for-like sales declined by 10% on the back of the company’s strategic decision to remove unprofitable bulk selling and mass couponing activities. Adjusting for this, like-for-like sales were down 1% in a deflationary market. Operating margin improved by 99 basis points to 6%, with cost savings and mix compensating for lower prices and cost inflation.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Tesco PLC315.00 GBX0.86Rating

About Author

Ioannis Pontikis  is an Equity Analyst for Morningstar

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