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Tesco (TSCOLN; Baa3, BBB-, BBB-; S) {TSCO LN Equity} 31s

CONSUMER STAPLES
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  • Tesco 31s flatteners (below) screen cheap here - 29s look well bid in & 31s have moved to recent wides (vs. Carrefour +14bps for 1-notch).
  • Earnings 2 weeks ago saw leverage drop to bottom of target range (2.2x vs. 2.3-2.8x target & 2.6x last year) - we don't see rating risk on (controlled) moves within target.
  • As we mentioned equity pay-outs are sizeable this year but some of that boost is to net out the expected £1b in total proceeds from closure on bank operations to Barclays. Total equity payouts look around £1.9b vs. guidance for retail FCF of £1.4-1.8b.
  • Liquidity (£3.2b cash) isn't a issue & neither is significant supply on refi (<£1b/yr) - most (~80%) of its debt is in lease liabilities (£7.6b).
  • It runs a 60% ownership on store properties which are valued at £16.9b - market devaluation was only -£0.3b/-2% last year. It does have a buyback strategy on leased stores.
  • No concern for us on mgmt comments in Q&A - affirmed target lev. range and noted low levels beneficial at current rates.

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  • Tesco 31s flatteners (below) screen cheap here - 29s look well bid in & 31s have moved to recent wides (vs. Carrefour +14bps for 1-notch).
  • Earnings 2 weeks ago saw leverage drop to bottom of target range (2.2x vs. 2.3-2.8x target & 2.6x last year) - we don't see rating risk on (controlled) moves within target.
  • As we mentioned equity pay-outs are sizeable this year but some of that boost is to net out the expected £1b in total proceeds from closure on bank operations to Barclays. Total equity payouts look around £1.9b vs. guidance for retail FCF of £1.4-1.8b.
  • Liquidity (£3.2b cash) isn't a issue & neither is significant supply on refi (<£1b/yr) - most (~80%) of its debt is in lease liabilities (£7.6b).
  • It runs a 60% ownership on store properties which are valued at £16.9b - market devaluation was only -£0.3b/-2% last year. It does have a buyback strategy on leased stores.
  • No concern for us on mgmt comments in Q&A - affirmed target lev. range and noted low levels beneficial at current rates.