For the first time in years there are positive signs coming out of Tesco (LSE: TSCO) that suggest the grocer’s long turnaround may finally be bearing fruit. Heading into Q1 results to be posted later this month, investors are hoping that last quarter’s 0.9% rise in UK like-for-like sales will be repeated. Early signs are promising as Kantar Worldpanel’s latest industry report saw Tesco improve its market share to 28.3%.
Despite this good news, the long-term challenges facing Tesco still appear as intractable as ever. The most damaging of these issues are the price wars among grocers that are no closer to ending. Asda’s parent Wal-Mart recently stated the company will be shifting from protecting profits to protecting market share, which suggests further discounting is on the cards. And the entry of Amazon into the online grocery delivery market through its tie-up with WM Morrison presages further downward price pressure.
While adjusted UK operating margins did improve slightly from 1.1% to 1.2% year-on-year in 2015, they remain far below the regular 5% or 6% margins posted just a few years ago. With competition increasing, price wars remaining an issue, and high debt levels, I won’t be expecting Tesco’s margins or share prices to increase significantly any time soon.
Long road ahead
The past month has been a good one for Sirius Minerals (LSE: SXX) as the prospective North Yorkshire fertiliser miner announced it had upgraded reserves by 12% and had selected building contractors for its ambitious project. Combined with the local authorities green lighting the mine development, shares have jumped 33% year-to-date.
Prospective investors would do well to exercise caution, though. Even if all goes according to plan, first production won’t occur until 2021 at the earliest. Reaching the first phase of production will also require a mind-boggling $3.5bn that will need to be raised through equity and debt placements.
Together with the technical challenges involved in building the 23-mile tunnel necessary to move the fertiliser from under North York Moors National Park, current investors are looking at a long road ahead of them before production even begins. Share prices will likely be incredibly volatile in the meantime and investing in a mine that has yet to be funded or has begun development remains far too risky for me.
One to watch?
Payment processor Worldpay (LSE: WPG) released a slew of good news in its latest annual report, including a 14% rise in the number of transactions processed and 9% bump in revenue. Less sexy than top-line growth but of equal importance was the news that Worldpay’s £450m invested in separating the company’s IT system from former parent RBS’s was progressing well and would be less capital-intensive going forward.
The bad news is that net debt of £1.4bn is worryingly high for the company at roughly 3.5 times EBITDA. Although the imminent disposal of its stake in Visa Europe could net roughly £900m, only 10% of the proceeds will go to the company. Sales growth in the near term looks solid though as increasing numbers of consumers switch to cashless payments across the developed and developing world. If revenue continues to grow at a steady clip and the balance sheet improves, Worldpay could be one to watch.
