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 thatconsists ofthe value of Tescos 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 Tescos 37bn long-term assets, such as fixed assets and intangibles, a value of zero.
Tesco stock looksattractive, doesnt it? Well, we need to dig a bit deeper into its liabilities
No Debt Crunch Around The Corner
Tescos 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 Tescos 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.
Theres 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 wont 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 Tescos pension deficit, however, could become problematic, particularly if cash flow erosion continues at a fast pace. I am more concerned about Tescos rising pension deficit than its overall indebtedness and debt maturity profile.
Its pension deficit, before deferred tax, doesnt 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 WorthRightNow?
There are a number of variables that need to be considered.
a) If Tescos 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 grocers fortunes around. Its a big if, however.
b) If you opt for a conservative valuation of of Tescos total assets base, the shares may reach 233p, for an implied upside of more than 30% from its current level. Thats 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
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
