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Tesco PLC’s Recovery Continues With A £250m Cash Infusion

Tesco (LSE: TSCO) is pushing ahead with its recovery. Today the group announced that it has agreed the sale of 14 1development sites to a fund and clients advised by the real estate investment manager Meyer Bergman.

The sale of the sites — located across London, the South East, and Bath — will raise a total of £250m for the retailer. Management commented that the group had reached completion on 11 of the sites, with deals on the remaining sites expected to complete in due course.

These sales are all part of Tesco’s plan to reign in capital spending, curtail expansion plans and strengthen its balance sheet. Tesco’s huge multi-billion pound land bank is just one of the assets the company can unlock value from, to rebuild its financial position. 

Unlocking value 

It’s estimated that 10,000 homes could be built on the 14 sites that Tesco announced the sale of today. But those 14 sites are just a fraction of the 49 projects Tesco announced that it was abandoning earlier in the year. Today’s figures show just how much cash is tied up in Tesco’s land bank.

And land sales is just one of the strategies Tesco is pursuing to tidy up its balance sheet and avoid a rights issue. City analysts have been calling for Tesco to undertake a rights issue for much of the past year, but the company’s management has so far avoided this drastic step. 

And it looks as if Tesco will be able to rebuild its balance sheet without asking shareholders for help. The sale of the group’s Korean business, Homeplus, raised £4.2bn, and in the six months to August 29, Tesco generated free cash flow of £281m, compared with a £134m outflow in the year-earlier period. Many City analysts weren’t expecting Tesco to generate any cash at all. 

Out of intensive care 

All in all, Tesco is slowly but surely reducing its debt and returning to health. That said, Tesco is facing an uphill struggle. Debt and debt equivalents, such as leases, stood at £17.7bn at the end of the first half. Its pension deficit stands at a staggering £4.2bn. But overall the group is making progress.

Sales from UK stores that have been open at least a year fell 1.1% during the first half, but that’s an improvement on the 4% decline in same-store sales reported last year. Further, the volume of goods sold rose 1.4% during the period, and the number of transactions rose 1.5% as Tesco started to win back customers. 

The latest figures from the City suggest that Tesco will report earnings per share of 7.4p for 2016 and 10.0p for fiscal 2017. Based on these numbers Tesco is trading at a forward P/E of 28, which is, unfortunately, the sort of multiple more suited to a high-growth tech company than a struggling retailer. City figures suggest Tesco is trading at a more restrained 2017 P/E of 21.5.

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Rupert Hargreaves owns shares of Tesco. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.