Tesco (LSE: TSCO) is pushing ahead with its recovery. Today the group announced that it hasagreed the sale of 141development 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 sitesexpected to complete in due course.
These sales are all part of Tescos plan to reign in capital spending, curtail expansion plans and strengthen its balance sheet. Tescos 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
Its estimated that10,000 homes could be built on the 14 sites that Tescoannounced 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. Todays figures show just how much cash is tied up in Tescos 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 companys 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 groups Korean business, Homeplus, raised 4.2bn, and in the six months toAugust 29, Tesco generated free cash flow of 281m, compared with a 134m outflow in the year-earlier period. Many City analysts werent 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 UKstores that have been open at least a year fell 1.1% during the first half, but thats 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.
