Tesco needs cash fast
Scrap all your latest Tesco forecasts, you won’t need them. It has officially concluded it has no idea what its full-year profit will be. Tesco […]
Scrap all your latest Tesco forecasts, you won’t need them. It has officially concluded it has no idea what its full-year profit will be. Tesco […]
It has officially concluded it has no idea what its full-year profit will be.
Tesco discovered a bigger-than-expected hole in its accounts and that mistakes in booking income went further back in time than initially assessed.
The departure of Tesco’s chairman, Sir Richard Broadbent, after a little less than three years at the helm, needs little explanation, under the circumstances.
It helps though, that he recognised in his statement “The issues that have come to light over recent weeks are a matter of profound regret”, that his decision to step down “reflects the important principle of accountability” and he that he had already begun “to prepare the ground to ensure an orderly process for my own succession.”
Tesco investors have had a lot to take in today.
We summarised the main points here.
After those, the next focus for investors will be any strategy hints that might filter through; even though the firm’s CEO David Lewis made it clear a strategic revamp was second priority to sorting out the accounting issue.
It appears he may begin on the path of devising a new strategy from now.
We also got confirmation today that the retailer is not planning a rights issue (sale of new shares).
But, clearly Tesco can’t afford to do nothing.
Tesco needs to address that its total debt at the end of last year exceeded its earnings before interest, taxation, depreciation and amortisation (EBITDA) by more than three times.
The ratio averaged 1.6 times on a trailing 12-month basis (according to the latest available data).
Interest coverage of 9.2 times over the period was ample, though relatively speaking, not as ample as Tesco’s peers, most of whom face challenges that are more moderate than Tesco’s.
By comparison, Sainsbury’s net debt over the last 12 months equated to 0.8 times its EBITDA, with Sainsbury in a stronger position overall versus its peer right now.
Tesco’s leverage ratios are important, because as earnings continue to fall, ratios become more and more strained.
With the firm’s credit ratings already verging on ‘junk’ territory (or ‘high-yield’, to be more polite) at major agencies, worsening ratios push the supermarket closer and closer to a potential automatic credit rating downgrade.
Such a downgrade would sharply increase costs Tesco has to pay to service its considerable debt.
It would also trigger further stock sell-offs by institutions, many of whom are mandated to hold stock that is classed as ‘investment grade’.
It’s worth pointing out that whilst the debt market is pricing higher risk to Tesco’s liquidity (the yield of a Tesco bond expiring in a year spiked 50% between August and early October) the risk of default is still thought to be negligible.
There are a number of assets owned by the retailer which are widely considered ‘non-core’ and which could fetch values, if sold, beyond their embedded value within the group.