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Tesco (TSCOLN; Baa3, BBB-, BBB-; S) RV heading into 1Q trading update

CONSUMER STAPLES
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  • We had a cheap view in primary on the the £10Y - not on the 7bp NIC it came with but on the steep secondary (mirrors BBB tobacco). Curve has flattened but its been driven by weak short-end and left our new 34s +9 wider at Z+161.
  • We also had a cheap view on the €31s on similar reasoning - again shorter 29s have moved out but 31s moving with it.
  • We don't see the Tesco bank sale triggering an event of default & have heard that may have drove low cash px shorter lines in - unclear if that's driven the reversal wider in €29s & £28/30s.
  • We keep both views unch further out. Implied roll-down is attractive to us as is excess carry among sector comps - in €'s the 31s gives +40bps over Ahold (Baa1/BBB+) & +20 over Carrefour (Baa1/BBB).
  • Tesco should give a Q1 trading update (3m ending May) soon. FY guidance was for adj. operating profit of £2.8b (c£2.95b) & retail FCF of £1.4-1.8b (c£1.6b). Latter excludes the £1b in bank sale proceeds on close later this year -it will be entirely directed to equity holders through buybacks.
  • Leverage at bottom of target, unclear if the ~€400m £ deal last month was to refi the €473m (outstanding) July line rolling off soon...we wouldn't rule out local supply.

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  • We had a cheap view in primary on the the £10Y - not on the 7bp NIC it came with but on the steep secondary (mirrors BBB tobacco). Curve has flattened but its been driven by weak short-end and left our new 34s +9 wider at Z+161.
  • We also had a cheap view on the €31s on similar reasoning - again shorter 29s have moved out but 31s moving with it.
  • We don't see the Tesco bank sale triggering an event of default & have heard that may have drove low cash px shorter lines in - unclear if that's driven the reversal wider in €29s & £28/30s.
  • We keep both views unch further out. Implied roll-down is attractive to us as is excess carry among sector comps - in €'s the 31s gives +40bps over Ahold (Baa1/BBB+) & +20 over Carrefour (Baa1/BBB).
  • Tesco should give a Q1 trading update (3m ending May) soon. FY guidance was for adj. operating profit of £2.8b (c£2.95b) & retail FCF of £1.4-1.8b (c£1.6b). Latter excludes the £1b in bank sale proceeds on close later this year -it will be entirely directed to equity holders through buybacks.
  • Leverage at bottom of target, unclear if the ~€400m £ deal last month was to refi the €473m (outstanding) July line rolling off soon...we wouldn't rule out local supply.