MARC has assigned ratings of AAA_ID(cg)/MARC-1_ID(cg) to Tesco Stores (Malaysia) Sdn Bhd’s (“Tesco Malaysia”) Proposed Islamic Notes Issuance Programme and AAA(cg)/MARC-1(cg) to Tesco Malaysia’s Proposed Conventional Notes Issuance Programme with a combined limit of RM3.5 billion. The ratings are underpinned by guarantees extended by Tesco PLC to Tesco Malaysia’s proposed issuances. Tesco PLC’s ratings reflect its position as a leading food retailer in an industry that is enjoying moderate growth prospects, and its increasing profitability. The ratings also take into account its aggressive debt-financed expansion and commitment to return value to shareholders which have resulted in negative discretionary cash flows. The stable ratings outlook mirrors that on Tesco PLC, which, in turn, reflects MARC’s expectation that Tesco PLC will continue to benefit from its strong position in the U.K. food retailing sector as well as the potential of its growing international operations. 

Tesco PLC is the largest food retailer in the United Kingdom (“U.K.”) with an estimated 30% market share and ranks among the top three retailers in Europe. The Group recorded a revenue of £42,641 million and an operating profit of £2,648 million for FY2007, increases of 8.1% and 16.1% respectively from the preceding financial year. Tesco PLC recorded 9.1% year-on-year growth in group sales (excluding VAT) in 1H2008 ended 25 August 2007.

As at 24 February 2007, Tesco PLC had a total of 3,262 stores worldwide with 68.1 million sq ft of retail space. Of the 3,262 stores, 1,988 stores were located in the U.K. while the remaining 1,274 stores were spread across 11 countries in Europe and Asia. The Group is planning to open another 574 stores in FY2008, inclusive of acquisitions.

Tesco PLC’s capital spending rose to £3.0 billion in FY2007 compared to £2.8 billion in FY2006. Total international capital expenditure amounted to £1.1 billion with £0.4 billion expended in Asia and £0.7 billion in Europe. A further £3.5 billion will be invested in the opening of 574 new stores in FY2008. Heavy capital expenditure has resulted in negative discretionary cash flows.

Tesco Malaysia was incorporated on 24 July 2000 to operate hypermarkets in Malaysia and commenced operations in 2001. It has become one of the leading hypermarket operators domestically, operating 18 stores in Malaysia with a total floor space amounting to 148,770 m² as at 27 September 2007, including 5 former Makro Cash & Carry (M) Sdn Bhd (“Makro”) stores which have been converted to the Tesco Extra format.

For FY2007, Tesco Malaysia posted its first operating profit since its inception amounting to RM17.9 million notably as a result of greater economies of scale and enhanced operational efficiency. Tesco Malaysia expects to generate adequate operating revenue to cover its financing cost under this Programme.