Wednesday preview: Tesco to report drop in first half earnings, no dividend, analysts say

Societe Generale predicts a 1.3% fall in first half like-for-like (LFL) sales to £29.86bn in the UK and the rest of Ireland (ROI) on the back of a second quarter LFL decrease of 1.1%. The supermarket reported a first quarter dip of 1.3%.

Earnings before interest, tax and one-off items are pegged to plunge 56% to £403m, as margins across the group are expected to slide.

In an effort to pay down debt and revitalise its UK business, Tesco sold its South Korean business for £4.2bn last month to MBK Partners.

“Despite the disposal of South Korea at a decent price, the group’s balance sheet remains stretched (FY 2015-16e net debt/EBITDAR ratio of 5.0x), and we think that it would make sense to pass the interim dividend,” said Societe Generale equity analyst Arnaud Joly.

“The key topic will be the group’s update on strategy (differentiation, price investment and margin recovery). The road to turn-around is likely to be a long one.”

Former Unilever executive Dave Lewis was appointed Tesco’s boss in July 2014, to help revive the company after losing UK market share to small discounters including Aldi and Lidl.

Barclays said the market is likely to focus closely on what the management is able to say about the operating progress in the core UK business.

Analysts at the bank said they doubt LFL sales in the second quarter will show much progress from the first quarter but “perhaps the company will echo the less negative recent commentary from Sainsbury on the wider UK market”.

“However, we are skeptical that Tesco’s results will elicit the same share price reaction as Sainsbury given that the company’s guidance for the current year implied reinvestment of any profits beyond a certain point – a principle we do not expect to be changed at this stage. We reinstate our rating at ‘equal weight’ and our price target at 240p,” they added.

Barclays estimates a 1.5% decline in LFL sales in the second quarter. UK and Irish operating profit is projected to drop from £550m to £155m, equivalent to margins declining from 2.5% to 0.7%.

The bank predicts first half operating profit to fall from £916m to £320m and net debt to rise £900m, partly due to a number of exceptional cash costs. No interim dividend is expected to be paid.

Wednesday 30 September

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