At 174p, the shares of Tesco (LSE: TSCO) currently trade in line with the value of its current assets per share. If you are buying Tesco today, you are paying a price that consists of the value of Tesco’s short-term liquidity: cash, receivables and inventory.
I Hear You: Tesco Is Attractive…
Tesco has about £13bn of cash and cash-like assets, which is in line with its market value, giving the reminder of Tesco’s £37bn long-term assets, such as fixed assets and intangibles, a value of zero.
Tesco stock looks attractive, doesn’t it? Well, we need to dig a bit deeper into its liabilities…
No Debt Crunch Around The Corner
Tesco’s main medium-/long-term funding is through a £15bn “Euro Note Programme”. As of today, it has £9.4bn of debt outstanding in euros (53%), British pounds (30.6%) and US dollars (16.4%). These debts mature between 2015 and 2057.
Only a fifth of Tesco’s total debt outstanding, or about £1.8bn, matures in the next 24 months, with £762m coming due in 2015 and about £1bn maturing in 2016 based on exchange rates as at 1 November.
Debt repayments could easily be covered by cash on hands or asset disposals. Fear not, Tesco is not going bankrupt any time soon.
There’s Time…
There is time to sort things out: a) short-term funding is also covered by a multi-billion commercial paper programme; b) undrawn credit facilities arranged by banks cover funding requirements until mid-2017. As a matter of fact, the banks won’t pull the plug on such a key client.
Tesco, however, needs to get its operations back on track and its finances in good order by 2019. Between 2017 and 2019, one third of its total debts, or about £3.1bn, must be either repaid or rolled over.
Operationally and economically, Tesco is a broken machine. It reputation is in tatters, too. Financially, however, it can withstand the pressure of tough trading conditions for years, in my view.
Pension Deficit
One caveat is that Tesco’s pension deficit, however, could become problematic, particularly if cash flow erosion continues at a fast pace. I am more concerned about Tesco’s rising pension deficit than its overall indebtedness and debt maturity profile.
Its pension deficit, before deferred tax, doesn’t make for a good reading:
- Fiscal 2012: it rose to £1.8bn from £1.3bn
- Fiscal 2013: it rose to £2.3bn from £1.8bn
- Fiscal 2014: it rose to £3.2bn from £2.3bn
- Half-year fiscal 2015: it rose to £4.2bn from £3.2bn
There remains a doubt that Tesco may have to inject new equity to keep its pension deficit under control…
How Much Is Tesco Worth Right Now?
There are a number of variables that need to be considered.
a) If Tesco’s profitability/dividends relative to its stock price is the most important element for you, then Tesco stock could drop to 100p, before perhaps making a comeback if its new CEO Lewis is quick in turning the grocer’s fortunes around. It’s a big “if”, however.
b) If you opt for a conservative valuation of Tesco’s total assets base, the shares may reach 233p, for an implied upside of more than 30% from its current level. That’s not unrealistic, in my view.
c) Finally, one could also argue that net current asset value of Tesco should be calculated by deducting only a small part of the total value of its liabilities. Then, at 174p a share, Tesco would be fairly priced…
