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Weathering the Storm

03 October 2019 by jbchevrel

Tesco PLC (TSCO) outperformed the broader € HY CDS space today. TSCO 5y CDS is +3 while XO32 is +11 and XO32 NAV is +11 in particular due to HEMABV (cf Grapples yesterday and April 10) widening getting out of control. TSCO reported solid numbers yesterday and the Brexit risk was enjoying a slightly more positive session today (GBP +0.4% vs EUR +0.7% vs USD – 5y UKT/DBR +2 intra day). Yesterday, TSCO reported operating profit £1.41b higher than the £1.30b expected. 1H adjusted pretax profit came £942m 1H revenue £31.91b vs BBG consensus £31.79b. As far as the geographic split is concerned, 1H UK & Ire revenue ex VAT incl fuel came £25.90b 1H Central Europe revenue ex VAT incl fuel £2.90b 1H Asia revenue ex VAT incl fuel £2.56b all above but close to estimates. 1H Tesco Bank revenue ex VAT £562m vs £553.7m estimate. As far as growth, LFL sales were a tad down in both the UK and Asia. Excluding tesco bank, net debt came down -£0.9b YOY and down -£0.6b over H1 alone. It now stands at £12.6b excl bank as discussed and incl lease liabilities under IFRS16. Pension-adjusted, still excl tsco bank, net debt to ebtida is slightly down but still above 3x. going forward, TSCO said the merger with Booker continues to generate synergies ahead of plan – that could end up saving ~£200m there. Despite that it is probably not a concern in the short term, market participants will weigh the uncertainty around the fact that the CEO Lewis will be going next summer (was unexpected), from a strategy risk standpoint.