CONSUMER STAPLES
It's held off on upgrade given the size of recent equity pay-outs - wants to have more time to see if Tesco operating performance holds which would allow BS to naturally delever and move in-range for an upgrade. As we said above we don't see value anymore in €Tesco BUT £Tesco curve continues to trade quiet steep; something we noted when the new 34s priced there. Flattening that 34 or 35s against the 30s looks attractive as does moving out of (higher rated) staples for +50bp pickup. In XCCY chart below light coloured are £ lines swapped over.
- It's mainly revised outlook on firm FY24 (12m to Feb) results but also on what is sees as a supportive macro environment ahead - it sees easing UK inflation helping retailer volumes.
- It has noted market share gains over last year from 27% to 27.7% - this was reiterated in Kantar data last week.
- It has little cares for the £700m Tesco bank sale proceeds going to equity holders given it didn't include bank operations in its credit metrics. It WILL include the remaining £80-100m in EBIT/yr (that was not sold) given small in size.
- It's noted co is running leverage at lower end of mgmt stated net 2.3-2.8x target (S&P eqv. 2.7x-3.2x). It needs leverage in its adj. 2.5x handle for an upgrade (Tesco reported 2.1x).
- Other assumptions its made is annual revenue to exceed £70b over next two years (for Tesco to achieve that in one year it would need +2.6% growth) and EBITDA margins to hold (around) flat yoy at S&P adj. 6.6% (consensus has small 35bp contraction in FY25).
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