Shares in the UK’s largest supermarket group Tesco (TSCO) rallied 4% to 263p against a weak UK market after the firm posted forecast-beating first half results and raised its full year profit outlook.
Group sales for the six months to August were up 2.6% to £27. 3 billion led by a 2.4% increase in UK and Ireland like-for-like revenues as the group outperformed the wider grocery market and Booker tapped into the recovery in hospitality and catering.
RAISING FORECASTS
Due to its better than expected performance in UK retail and a return to profitability at Tesco Bank after last year’s increase in bad debt provision, the group raised its full year profit forecast.
Given a first half retail operating profit of £1.39 billion, against analyst forecasts of £1.26 billion, full year earnings are now expected to be between £2.5 billion and £2.6 billion compared with previous guidance of £2.3 billion or in line with the 2019-20 financial year.
RAISING RETURNS
Thanks to a reduction in net debt of £1.7 billion and an almost doubling of retail free cash flow to £1.54 billion - of which £400 million will unwind in the second half - the firm matched last year’s interim dividend payout of 3.2p per share and revealed an inaugural £500 million share buyback.
Under the company’s new capital allocation policy, investment will be targeted at ‘capital-light’ operations like convenience stores and its online offering and not at opening new large stores.
This should help generate between £1.4 billion and £1.8 billion of retail free cash flow per year going forward. In addition, the firm has identified around £1 billion of efficiencies which it believes it can take out of the business over three years.
That gives it scope not only to raise the pay-out ratio but to launch more buybacks once it has completed its investment programme.
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