Analyst Note
| Ioannis Pontikis, CFA |Tesco announced first-half 2022 results with sales of GBP 30.4 billion, up 5.9% and EBIT at GBP 1.46 billion, up 40.6%; a strong set of numbers reflecting resilient second-quarter performance in large stores (up 6.9%), convenience (down 1.7% from down 8.2% in the first quarter), food (up 0.7% versus down 2.1% in Q1 due to the stockpiling impact) and clothing (up 35.9% versus 52.1% in the first quarter). Booker was also a strong contributor, with retail's two-year LFL at 19.4% and catering's one-year LFL at 54.4% (positive impact from acquisition of Best Food Logistics). Retail operating profit in the U.K. and ROI grew robustly by 16.5% due to lower coronavirus costs, stronger nonfood margin mix and operating efficiencies that offset inflationary pressures, with similar contributions for Central Europe (profit up 18.6%). Tesco Bank surprised on the upside, with Tesco now expecting profitability of at least GBP 120 million in fiscal 2022 (versus GBP 85 million in our model). More importantly, Tesco raised retail profit guidance to GBP 2.5 billion-2.6 billion from about GBP 2.3 billion before, versus GBP 2.54 billion in our model, which is higher than company-compiled consensus of GBP 2.47 billion. Although we don't expect to materially alter our GBX 273 fair value estimate for Tesco, accounting mainly for better-than-expected bank profitability, we reiterate Tesco is one of the best-positioned grocers in our coverage. On the current share price, with over 6% cash return to shareholders through a regular dividend (about 3.8% fiscal 2022 dividend yield in our estimates) and just announced ongoing share buyback program (GBP 500 million or 2.5% of market cap), dominant offline (27% market share), online (35% market share) and food service (largest player) position in the core U.K. market as well as potential upside from ad opportunities in its digital platform and automation-driven online fulfillment efficiencies, Tesco expected returns to look attractive versus peers.