Tesco Credit Risk And Analysis Report

Tesco Credit try And compend ReportAs members of Credit depth psychology division, our line escaper has asked us to prep atomic number 18 a comprehensive reliance abbreviation chronicle for Tesco Plc, as it comes out with a young long bond issue, to fund its acquisition of Hilton nourishments. This credit peril report foc physical exercises among opposite things, on the rail line background and outline of Tesco and Hilton Food, digest of its annual reports, association websites and other sources, a discussion of the techniques used in the analysis, justification of techniques/ study assumptions used in our analysis and proportionalitynale behind our teams recommendation on the credit military rank of the bond issue.2. Tesco task organization Description and StrategyTesco Plc was founded by Jack Cohen in 1919. It employs about 470,000 staff glob ally. It is the largest Britishretailerby both(prenominal) global sales and domestic market sh ar, with salarys surp assing 3billion. It is contemporaryly the third largest global retailer based on r dismantleue, behind Walmart and FrancesCarrefour, but second largest based on attain, ahead of Carrefour.(Ryan 2004).to begin with specializing in intellectual nourishment and drink, it has alter into atomic number 18as such asclothing,consumer electronics, monetary operate, telecoms,home, nearlynessandcar insurance policy,dental plans, retailing and renting DVDs,CDs,music downloads,Internet servicesandsoftw are. Tescos trading military operations are divided into UK and International operations. In the UK, Tesco stores are secernate by size and the range of products sold. (wikipedia.org).Tesco besides retails with its online shop channels, tesco.com and Tesco Direct. Tesco has external operations in the following countries- China, Croatia, Czech Republic, France, Hungary, Republic of Ireland, Indonesia, Japan, Malaysia, Poland, Slovakia, South Korea, Thailand, Tur depict, linked States (Annual Report 2009 hereby referred to as -AR2009).Business outlineTesco follows the concept of The Tesco Way. It is aimed at improving its competitiveposition in the market by fit more customer focused and concentrated on differentiating itself from other retailers through the services it provides. Tesco has developed principles like Better for Customers, Simpler for Staff and Cheaper for Operations.(Tesco website)Its present operations are based on its strategy laid down in 1997 which focuses on these 5 key objectivesTo be a successful internationalist retailerTo grow the heart UK businessTo be as brawny in non-food as in foodTo develop retailing services-such as Tesco Personal Finance, Telecom and Tesco.com andTo put communities at the heart of what we do.(AR 2009)It is the pursuit of this five-part strategy that has allowed the business to diversify into new emerging markets.Tesco as a business operates a instruction Wheel a balanced scorecard move whereby goals are pr epare for different areas of the business and overall progress is assessed on a every quarter origination in all countries, to help manage functioning and deliver business strategy. The Steering Wheels key areas of focus are fiscal, customer, operations, and employee. Every store gets a monthly steering wheel update, a summary of its metrics within each of the four arcs, so that all employees in Tescos multiple regions and formats get feedback on their performance. The steering wheel has helped the order stay focused on its strategy even as it see rapid maturation over the past two decades (AR2009).Please none- For Business Description and Business Strategy og Hilton Food recreate see cecal appendage A.3. F causeors affecting credit rating of TescoFor the purpose of this credit analysis report I would be analyzing three calculates influencing the credit rating of TescoThey are that is to say1) Business put on the line2) Corporate system essay3) pecuniary perilDefiniti ons T open of Factors affecting credit rating of TescoBusiness Risk harmonise to wisegeek.com, A business risk is a circumstance or factor that may have a disconfirming impact on the operation or favorableness of a given comp whatsoever. Some clock referred to as bon ton risk, a business risk burn be the result of inborn conditions, as well as some external factors that may be evident in the wider business community. When it comes to outside factors that can create an chemical element of business risk, one of the most predominant risks is that of a change in invite for the goods and services produced by the company. If the change is a corroboratory one, and the demand for the offerings of the company subjoin, the come up of risk is falling offd a great deal. inbred factors may also result in the development of significant business risk for the investor.Corporate Governance RiskAccording to SearchFinancialSecurity.com Corporate government is a brim that refers broadly t o the rules, processes, or laws by which businesses are operated, regulated, and learnled. The bound can refer to congenital factors defined by the officers, stockholders or authorship of a corporation, as well as to external forces such as consumer groups, clients, and government regulations. A well-defined and enforced corporate governance provides a structure that, at least in theory, works for the benefit of every(prenominal)one bear on by ensuring that the enterprise adheres to accepted ethical standards and best practices as well as to formal laws. To that end, organizations have been formed at the regional, national, and global aims. Risk heed factors are employed to manage Corporate Governance Risk.Financial RiskAccording to Wikipedia.org, The risk that a company or despatch will not have adequate property flow to impinge on pecuniary obligations and then causing the business to file for bankruptcy. Financial risk is the additional risk a shareowner bears when a company uses debt in addition to equity financing. Companies that issue more debt instruments would have higher financial risk than companies financed mostly or entirely by equity. Bilateral handicraft can depend upon a mutual simile of wants. Before any transaction can be undertaken, each party must be able to supply something the other party demands. To overcome this mutual coincidence problem, some communities had developed a system of intermediaries who can warehouse and mint goods. However, intermediaries often suffered from financial risk.4. Discussion of Techniques and Methods Employed for Credit Rating4.1 Analysis of Tescos Business Risk attire abridgment OF TESCO PLC(For Definition and Explanation of SWOT Analysis please refer Appendix E)Swot Analysis of TescoStrengths change magnitude market shareInsuranceTesco onlineBrand valueUK market leaders reinforcedOpportunitiesNon-food retailHealth and beauty encourage international growth(Source Datamonitor)(1) Strengths( a) Sales GrowthWith the youthful Global Financial Crisis (hereby referred to as GFC) retail sales have fallen, but Tesco does not seem to be impact as its sales revenue grew by 10.92% in 2008 and 11.86% in 2009.(b) grocery shareTesco still holds the largest share of the UK retail market. It maintains this by constantly diversifying into new sectors and consolidating its existing position as a market leader.(2) WeaknessesTesco Finance profit levels were impact through bad debt, credit card arrears and household insurance claims.Tescos position as a price leader in UK markets can lead to reduced profit margins in order to retain the key price points on must have commercial items.Grocer outlets are not set up to operate as specialist retailers in ad hoc areas of product which can be capitalised on by other little bespoke retailers.Although international business is growing and it is expected to contribute greater amounts to Tescos profit over the next few years. The company is st ill super dependent on the UK market.(3) OpportunitiesThe development of Tesco Direct through online and catalogue shopping will grow the use of technology, providing the launch pad for larger non food based products with moderate to high margin lessens and less focus on sales and margin per foot return to space.Further international growth.(4) Threats join on foreign exchange exposure with international growth.Rising raw worldly costs from both food and non food items will impact profit margins overall.Continuous price wars surrounded by other retailers e.g ASDA, Sainsbury and WM Morrisons.(Sourcebusinessteacher.org.uk)P.T.O (Please turn over)PESTLE ANALYSIS OF TESCO PLC TABLE( for explanation of PESTLE, please see Appendix F)PESTLEANALYSISOFTESCOP L CPoliticalTescos organic growth internationally into countries in Europe, Asia and America performer it is influenced by the political conditions of these countries. Tesco is subject to a wide variety of regulations in the differe nt countries in which it operates because of the diverse nature of its business. Tesco may be impacted by regulatory changes in key areas such as homework laws, trading hours, and tax rules as well as by interrogation by the competition authorities. Tesco is influenced in the UK by employment legislations such as the minimum wage requirementEconomicalEconomic factors and the state of the thrift affects Tesco, because these influence the business environment of operation, business expectation of investors and the consumption level of Tescos customers which all translate into the levels of demand, supply, and pricing of Tescos goods and services. The economic factors have been seen to have caused the decrease in profit growth rates being experienced by Tesco. Tesco has responded to these issues by ensuring that its product variation strategy is upheld in all their stores. i.e having the comparable product with varying quality and price for the different target markets in the same store.Socio-Cultural FactorsTesco considers the renewing of its customers in terms of culture and tries to adopt their wide-ranging expectation by having most food and non food items that are required. This strategy is obvious with aisle for world foods, clothes etc. Benefits from cultural diversity and globalization are also evident in staffing of their stores.Technological engineering science as a major driver of efficient resource habit which has allowed Tesco staff to be more efficient at their jobs with the use of a wide variety of sayners for their sales at their tills and for stock/inventory management. A new invention are self service machines where customers can scan and pay for their shopping, this innovation has also lead to a reduction in staff cost.LegalIn the UK, the Financial Services Authority (FSA) which is the regulator of all providers of financial services requires Tesco Personal Finance to be able to meet its sterling obligations without recourse to the who lesale markets for a period of at least five business age. To meet regulatory requirements a diversified portfolio of high quality liquid and salable assets is maintained. Cash flow commitments and marketable asset holdings are measured and managed on a daily basis purlieualTesco has been able to manage its environmental impact by adopting a number strategies, some of which are an energy saving initiative lead, to crack of environmental store in a quest for zero-carbon, carbon labelling of products, verdancy club card initiative which encourages customers to recycle.4.2 Analysis of Corporate Governance RiskAn analysis of the handlers report on corporate governance understandably defines the conductors roles and goals for Tesco Plc, as its main aim is to generate shareholder value and safeguard their long fires. Tesco, follows the Combined Code on Corporate Governance, especially Section 1, as defined by the Financial Services Authority (FSA), on respect of the Code throughou t the year. The decision maker placard , complied with the Code, with the exception of the provision that at least half the Board, excluding the Chairman, should comprise Non-Executive theatre directors determined by the Board to be independent. This was as a result of the resignation of Carolyn McCall and E. Mervyn Davies as Non-executive managing directors overdue to conflicts of interest. Tesco name Laurie McIlwee as the new sort out Finance theater director, and Jacqueline Tammenoms Bakker and Patrick Cescau and Ken Hanna as Non-executive Directors, thus becoming fully compliant again with the code. Laurie McIlwee has been with Tesco for nine years and has a very strong track record in both finance and operations. In his most recent role as Distribution Director Laurie was responsible for transforming the whole network a tremendous achievement, which reflects careful management succession planning at Tesco.The structure of the Board and the integrity of the case-by-cas e Directors project that no single individual or group dominates the finish making process. All Directors have to submit themselves for re-election at least every three years if they wish to continue serving and are considered by the Board to be eligible. The Non-executive Directors bring a wide range of skills and experience, as well as independent judgement on strategy, risk and performanceto the participation.The Board has set out a clear Schedule of Matters taciturn for Board Decision in order to ensure its overall control of the Groups affairs.These include the approval of the Companys strategic and operating plans annual and interim financial statements major acquisitions and disposals authority levels for expenditure treasury policies risk management and inbred control systems group governance policies and succession planning for senior executivesP.T.O additional Corporate Governance Role- TableAudit, net income and Nominations chargesThe Board governs through a number of statutory Board Committees the Audit, Remuneration and Nominations Committees to which certain responsibilities and duties are delegated. These Committees are properly authorised under the constitution of the Company to take decisions and act on behalf of the Board within the parameters laid down by the Board. The Board is kept fully informed of the work of these Committees and any issues requiring resolution are referred to the full Board as appropriate.A summary of the operations of these Committees is set out. The performance of the Board is a fundamental component of the Groups success. The Board on a regular basis reviews its own performance.Relations with stakeholdersTesco maintains a close relationship with all its stakeholders including customers, staff, suppliers, investors, non-governmental organisations and others, to ensure that its long-term strategy is sustainable. These include corporate social responsibility targets towards-EnvironmentCommunitySuppliers and Ethi cal tradingCustomersChoice HealthPeopleand tombstone Performance Indicators (KPIs)of the Steering Wheel.Internal controls The Board is responsible for the Companys system of internal control and for reviewing the effectiveness of such a system. Tesco has a Group-wide process for clearly establishing the risks and responsibilities assigned to each level of management and the controls which are required to be operated and monitored. Both the internal and external audit, PricewaterhouseCoopers LLP, contribute towards maintaining effective internal financial control systems.Whistleblowing PolicyThe Group operates a whistleblowing policy and has a private Protector Line service accessible to concerned employees where they can report, anonymously if necessary, on issues of malpractice within the business. These issues include unethical behaviour such as fraud, dishonesty and any practices that endanger their staff, customers or the environment. Complaints do are inured as confidentia l and are investigated. Where appropriate, matters will be escalated to the Director of Group Security for further action.ManagementAt Tesco, trading is tracked on a daily and weekly basis, financial performance is reviewed weekly and monthly, and the Steering Wheel is reviewed quarterly. Steering Wheels are operated in business units crosswise the Group, and reports are prepared of performance against target KPI s on a quarterly basis enabling management to measure performance. mete outholder engagementTesco is commit to maintaining a good dialogue with shareholdersthrough proactively organising meetings and presentations as well asresponding to a wide range of enquiries. During the year, the Chairman, Chief Executive and Finance Director meet with most of the leading shareholders to discuss issues relating to the board, strategy and governance matters, as well as new developments within the business. In addition to this the Company Secretarys office, Investor Relations and other teams within the business engage with shareholders on a regular basis, and on a widerange of issues.Directors stipend revealingTesco is already a large and profitable company. A 10% increase in Company value equates to some 3bn in additional shareholder value, equivalent to a FTSE 50 organisation. Continuing to grow and expand profitability from such a high base is challenging but forms the core of Tescos strategy, and its supporting processes including executive remuneration. The result for 2008/9 included improvement on most of the underlying performance measures relating to productivity and growth. More than two-thirds of total remuneration (excluding pension) is linked to performance. Long-term performance is rewarded through delivery of shares and short term performance through a combination of cash and compulsory deferred shares. The Remuneration Committee believes that the majority of total remuneration should be performance-related and delivered largely in shares to closel y align the interests of shareholders and Executive Directors. When setting the remuneration of Executive Directors, the Committee considers the Groups performance on environmental, social and governance (ESG) matters. Specific ESG performance targets are applied to certain elements of the remuneration structure, in order to reinforce positive and responsible behaviour by senior management.(Source for all Corp Governance notes AR2009)Tesco Board of Directors- Table adduceJob TitleBoardNameJob TitleSir Terry LeahyCEOExecutive BoardJacqueline Tammenoms BakkerNon-Executive DirectorRichard BrasherCommercial and TradingDirectorExecutiveBoardRodney Chase representative Chairman and SeniorNon-ExecutivePhilip ClarkeInternational and IT DirectorExecutive BoardCharles AllenCBE Non-Executive DirectorAndrew HigginsonFinance and Strategy DirectorExecutive BoardE. Mervyn DaviesNon-Executive DirectorDavid Potts sell and Logistics DirectorExecutive BoardDr. Harold EinsmannNon-Executive DirectorLaur ie McIlweeGroup Finance DirectorExecutive BoardKen HydonNon-Executive DirectorLucy Neville-RolfeCorporate Legal personal business DirectorExecutive BoardGraham PimlottNon-Executive DirectorTimMasonMarketing, Ecommerce, billet and Republic of IrelandDirectorExecutive BoardPatrick CescauNon-executive DirectorDavid ReidChairmanNon Executive BoardKaren CookNon-executive Director(Source-AR 2009)4.3 Analysis of Tescos Financial RiskFor the financial analysis of Tesco, traditional ratio analysis (For Definition and Explanation of symmetry Analysis please refer Appendix C) has been used lettuceability liquidnessFinancial GearingInvestorand Efficiency ratios.PROFITABILITYRatio200920082007 ingathering on Equity (ROE)16.66%17.89%17.96%Return on Capital Employed (ROCE)6.96%9.25%10.67% clear up Profit Margin3.98%4.5%4.45%The analysis of the Return on Equity enters that the return meagerly fell in 2008 to 17.89% from 17.96% in 2007, it further decreased in 2009 to 16.66%. Further investiga tion of this shows that though the retained earnings in 2008 of 6,871m is an increase from 2007 level of 5,693m, the management of Tesco was prudent in the use of available resources, due to the recent GFC. Return on Capital Employed reveals a consistent and sloshed decline in this rate of return from 10.67% in 2007 to 9.25% in 2008 and 6.96% in 2009. This trend was primarily due to a consistent rise in the current assets of Tesco it rose in 2007 from 4,576m to 6300m in 2008, then in 2009 to 14,045m. The Net Profit Margin go oned almost the same, from 2007 with 4.45% to 4.5% in 2008, but decreased in 2009 to 3.98% for each pound of sales. This can be attributed to the recession, where people tend to evanesce less and save more.LIQUIDITYRatio200920082007Current Ratio0.760.580.56 promptly Ratio0.610.350.32The Current ratio shows a consistent growth from 0.56 in 2007 to 0.58 in 2008 and then highest of 0.76 due to a 127.15% growth of current assets in 2009, this shows a continuous i mprovement in Tescos liquidity. Even though a good growth is observed the ratio is a reflection that Tesco is highly exposed to its liabilities. This ratio also shows an change magnitude tendency of liquidity problems since it current assets cannot cover its current liabilities. The Quick ratio is similar to that of the current ratio, with a good deal lower ratios of 0.32 in 2007 to 0.35 in 2008 and highest ratio of 0.61 in 2009. These results also show increasing liquidity as well as a piteous coverage of current liabilities by the quick assets.Cashflow AnalysisTescos tolerant CashflowCashflow tip2009In millions2008In millionsCashflow from Operating activities49784099Net cash used in investing activities59742954Dividends paid883792 touch on paid562410Tax paid456346Free Cashflow-2897-403Cashflow Ratios200920082007Cash Return on Sales9.16%8.66%8.28%Cash Debt insurance coverage19.39%25.22%25.82%Cash-Flow Coverage63.21%91.04%94.66%On analysis of Tescos free cash flow), it dropped significantly from 2007 to 2009, it is in negative of -199m in 2007, increasing to -403m, and sharply increasing to -2897m respectively.. The increase in dividend payout accounts for 91m (between 2008 to 2009) and explains a small portion of the drop . But the total drop in the cash flow from 2008 to 2009 is a sharp -3300m. The analysis of Cash Return on Sales determines that from 2007 to 2009 it has change magnitude by 8.3%, to 8.66% and then to 9.16% respectively. Tescos cash return on sales in 2009 of 9.16% is higher than its Net Profit margin of 3.98% in 2009, which is a good sign. The Cash Debt Coverage also shows that Tescos cash position worsened from 2007 to 2009 (i.e) the cash to debt coverage was 25.82%, 25.22% and 19.39% respectively. One of the reasons is that Tescos long-term debt increase between 2007 to 2009 by 8934m. The CashFlow Coverage shows that the cash generated by Tesco from its operations, to meet its obligations, decreased from 94.66% in 2007, to 91.04% in 2008 , to 63.21% in 2009. To cover the rest of its cash needs, Tesco had to use cash on hand at the beginning of the year, to make up the cash shortfall.P.T.OFINANCIAL GEARING LEVERAGE AnalysisRatio200920082007Interest Cover ratio6.71 multiplication11.16 times12.26 timesDebt to shareholders equity2.54 times1.53 times1.35 timesDebt to Capital55.86%40.36%35.03%The Interest Cover ratio shows a decline from 12.26 times in 2007 to 11.16 times in 2008 and the lowest ratio of 6.71 times in 2009. The Analysis of the finance cost shows the drop in 2009 was primarily due to an 87.75% increase in non-current liabilities which lead to a 91.2% increase in finance cost. Debt to shareholders equity, shows the usage of creditors by Tesco for every 1 from investors, increased from 2007 to 2009, by 1.35, 1.53 to 2.54 times respectively. This reflects that the dependence of Tesco on money raised(a) by borrowing has sharply increased in 2009, from 2007 compared to its usage of money raised by sellin g shares to investors. This also reflects that in 2009, Tesco had a high amount of debt at 2.54, which means it will have to pay higher interest rates to finance its capital activities. Tescos Debt to Capital increased from 35.03% in 2007, to 40.36% in 2008 and rose to 55.86% in 2009, which is very high, and indicates an increasing cost of operating, as it tries to meet its obligations of paying higher interest rates.P.T.OINVESTOR RATIOSRatio200920082007Dividend Payout Ratio26.8%24.4%21.6% moolah per Share (EPS)27.50p26.95p23.84pPrice/Earnings (P/E) Ratio16.30 times16.73 times18.91 timesThe analysis of Dividend Payout Ratio shows the payout ratio has been increasing from 21.6% in 2007 to 24.4% in 2008 and 26.8% in 2009. Earnings per Share shows that it is increasing year to year, with EPS in 2007 of 23.84p, in 2008 of 26.95p and 2009 of 27.50p, with the largest increase between 2007 and 2008. The profit for the year in 2008 was higher than in 2007and there was also a reduction of sh ares in issue from 7,947m to 7,863m in the same year. The analysis of the Price/Earnings shows a continuously declining P/E ratio, with 18.91 times in 2007, 16.73 times in 2008, and 16.30 times in 2009, probably due to a decreasing growth rates in profits- 12.16% growth in 2008 and 1.69% growth in 2009.P.T.OEFFICIENCY RatiosRatio2009In years2008In years2007In daysInventory Turnover full stop (ITP)19.44 days20.31 days17.89 daysTrade Receivables Period (TRP)12.08 days10.12 days9.24 daysThe analysis of the Inventory Turnover Period shows an increase from 17.89 days in 2007 to 20.31 days in 2008 and fell to 19.44 days in 2009. The Trade Receivables Period shows a consistent increase in the TRP in 2007 9.24 days to 10.12 days in 2008 and a higher increase to 12.08 days in 2009. This could be due to stiff competition in the retail industry and increased credit sales demands of customers.Please note- For Analysis of Financial Risk of Hilton Food, please refer to Appendix B.5. Justificat ion of assumptions made and techniques used5.1 Justification of assumptions made -Tablea)It is assumed that Tesco will takeover Hilton Food and fund its acquisition bythe potential issue of long -term bonds. This assumption is taken to conductthis busy credit risk analysis.b)Tesco Financial Year (FY) ended on Feb 28, 2009, and Hilton Food FY ended on 31 December 2008, so despite the explanation year differences, we have maintained that all accounting conditions still remain the same for the sake of comparative study.c)Tesco is one of the biggest retailers in the world with a diversified business, and the assumed acquisition is due to Hilton Food (HF) being a customer of Tesco in the real world, where HF supplies packed meat to Tesco stores across UK and Europe. So this acquisition, would make economic sense to Tescos business expansion, by provide packed-meat under its own brand name, and economies of scale.P.T.O5.2 Justification of techniques used -Tablea)We have simply conduct ed Business Risk and Corporate Governance Risk Analysis for Tesco, and not for Hilton Food (HF), as with the future acquisition HF would either be a subsidiary or merge with Tescos entity, and come under Tescos management. Therefore, it would be Tescos Business and Corporate Governance risk which would influence Hilton Food.b)We have analyse both Tescos and HFs Financial Risk, because when an investor would look at Tescos long-term bond issue, he would like to know about the business and financial risk of both Tesco and HF.c)Financial Risk Analysis (FRA) of Tesco has been done for 2007, 2008 and 2009 and FRA has been done for HF still for 2009, because we have presumed after the acquisition, HF would be a part of Tescos business, so only current2009 FRA is done for HF.d)We have not designated any credit rating like AA, BB etc. according to SP, Fitch or Moodys, because, they use advance(a) credit risk models, and calculations for default and recovery rates, and credit scoring syst em, Our analysis is based on studying the Business, Corporate Governance and Financial Risk by simpler analytical tools.6. Rationale Behind Recommendation- Highlights Tablea)The analysis of Tesco Plc, reveals that the company has shown good profitability and revenue growth, with good sales growth even in difficult times (GFC). Tesco as a business has revealed further expansion plans across different countries. The SWOT Analysis of Tesco reveals that Tesco, is following a sound business model.