By most measures, Tesco has been a pandemic success story: in only five weeks last year the company doubled the number of online delivery slots it offered to 1.5 million a week; it hired 49,600 temporary staff in a year to keep up with demand; and, far from requiring government support, it paid back £585 million in business rates relief.
Yet after what it described in its annual results as an “exceptional year,” its share price is 22.5 per cent lower than 12 months ago at 227½p and little-changed from five years ago, when the shares stood at about 236p. They fell 2 per cent, or 4¾p, after yesterday’s results.
Despite the strong performance of its stores in Britain and Ireland over the period when lockdowns and working from home resulted in bumper sales, group profits were hit by the cost of responding to the pandemic. That was £892 million in the UK alone as a result of hygiene measures, the cost of hiring new staff, plus sick pay for workers who caught Covid-19 or had to self-isolate. Tesco Bank also recorded a £175 million operating loss for the year.
So what might revive sentiment towards the shares? Well, as pandemic-related costs fall to about a quarter of last year’s level, Tesco expects a “strong recovery in profitability” in this financial year. A revival in retail profitability to about the same level as 2019-20 would mean earnings before interest and taxes of £2.33 billion, according to analysts at Barclays, with the caveat that this estimate shows “an understandable degree of caution”.
Tesco acknowledges that sales volumes are likely to fall if the pandemic is brought under control as shoppers return to eating out. The big questions are whether the chain can hang on to the customers and the share of spending that it gained in the past year, and how to make the growing share of online sales more profitable. The group gained an edge over the discounters in the pandemic because of its established online business and that the fact that it was able to expand so rapidly. It is now testing ways that it can bring down costs.
Tesco maintained its full-year dividend at 9.15p yesterday, the same level as last year, despite the fall in pre-tax profits to £825 million from £1 billion a year ago. It remains “committed to maintaining capital discipline and returning excess capital to shareholders”. It has returned £5 billion to shareholders in a special dividend after completing the sale of its business in Thailand and Malaysia late last year.
No new buybacks were announced, but analysts at Shore Capital, who rate Tesco’s shares as a “buy”, said that future capital allocation, including a recurring buyback programme, were “central to the stock’s investment thesis”, adding that they were “encouraged by the mood music” in Tesco’s results statement.
What else might increase interest in the shares? Tesco has slimmed down its portfolio, making the investment case easier to assess. Outside its main UK and Ireland supermarket business, it has only Tesco Bank and stores in central Europe. It expects the bank to return to profitability this year, after lending and credit card spending declined last year, and has increased its provisions for bad debts as a result of the economic damage caused by the pandemic.
Ken Murphy, the company’s chief executive, says that his focus will continue to be value, along with customer loyalty and convenience. However, before the results, analysts at HSBC called on British food retailers to be “bolder”, saying that Tesco needed “a clear strategy and value proposition to reinvigorate investor interest”. The market reaction yesterday suggests they haven’t done that yet.
Advice Buy
Why Attractive dividends and possibility of further share buybacks
Smith & Nephew
The reopening of pubs and hairdressers has been greeted with jubilation, but many people have been waiting for something rather more significant than a drink or a haircut. Their surgeries have been delayed by the pandemic as hospitals diverted resources to Covid-19 patients.
Nearly ten million Britons are waiting for surgical procedures, up from four million before the pandemic, including 100,000 patients whose joint replacement operations were cancelled during the first wave of Covid-19, according to The Lancet Rheumatology journal. In the United States, a May 2020 study by The Journal of Bone and Joint Surgery found that America could face a cumulative backlog of more than a million joint and spine surgery cases by mid-2022.
Smith & Nephew, the FTSE 100 medical technology company best known for making artificial knees and hips, has suffered along with its waiting patients. Its revenues fell by 11.2 per cent to $4.6 billion last year and trading profits declined by 42 per cent to $683 million.
Smith & Nephew said in February that its business would continue to be hit by the impact of the pandemic throughout the first half of 2021. Since that announcement the shares have struggled to recover, closing at £14.16 yesterday, up 10p, or 0.7 per cent, but well down from about £16 before the announcement and £19 in February 2020.
Yet as vaccination rates pick up and healthcare providers address the surgery backlog, the long-term investment case remains. At the end of the first lockdowns last summer, Smith & Nephew’s revenues recovered quickly: after a 29.8 per cent fall in the second quarter of 2020, the decline slowed to 3.7 per cent in the following three months.
Tempus recommended holding the shares in November and is now reiterating that view before Smith & Nephew’s first-quarter results on April 29. Analysts at Barclays recently noted a “significant valuation gap” between the company and its peers, with the shares trading at a price-to-earnings ratio of 22 times its estimated 2021 results, compared with 28 times for European Union medical technology and services companies.
Advice Hold
Why Pent-up demand for elective surgery
