CREDIT ANALYSIS REPORT

Tesco Stores (Malaysia) Sdn Bhd - 2009

Report ID 3471 Popularity 4097 views 126 downloads 
Report Date Dec 2009 Product  
Company / Issuer Tesco Stores (Malaysia) Sdn Bhd Sector Trading/Services - Retailing
Price (RM)
Normal: RM500.00        
  Add to Cart
Rationale

MARC has affirmed Tesco Stores (Malaysia) Sdn Bhd’s (Tesco Malaysia) RM3.5 billion Conventional and Islamic Commercial Papers/Medium Term Notes Programme at AAA(cg) /MARC-1(cg) and AAAID(cg) /MARC-1ID(cg) respectively. The ratings reflect the credit strength of the corporate guarantee provided by its parent company, UK-based Tesco plc for the rated facilities and MARC’s public information ratings on Tesco plc which are underpinned by the group’s strong global market position in grocery retailing, its geographical diversity and steady profit margins despite weak economic conditions in several of its markets.  However, Tesco plc continues to face challenges in improving its financial measures following a rapid pace of debt-funded expansion of stores, particularly in the US, where the retail industry has been adversely impacted by the recession. MARC has revised the rating outlook to stable from negative, taking into account Tesco plc’s measures to restore its credit metrics, which include scaling back its capital expenditure, paring down its borrowings from its cash balances, suspending its share buyback programme and divesting its property assets.

Tesco Malaysia, a 70:30 joint-venture between Tesco plc and Sime Darby Berhad, has operated Tesco-branded hypermarkets in Malaysia since 2000 and has rapidly expanded its network of stores to 30 as at 1HFY2010. Tesco Malaysia is the leading hypermarket operator in the country in terms of sales based on a market share of 10.2% in the twelve weeks ending May 17, 2009; its nearest competitor, Dairy Farm Ltd’s Giant holds a market share of 7.5%. MARC notes that its ability to successfully penetrate the competitive retailing market in the country has been largely due to strong support from its parent company, Tesco plc, in providing inter-company loans to fund Tesco Malaysia’s domestic expansion and management and technical expertise for its operations that has enabled the hypermarket to replicate its parent’s successful multi-segment targeting strategy and supply chain management efficiency. 

For financial year ending February 28, 2009 (FY2009), Tesco Malaysia’s revenue rose by 28.6% to RM3.3 billion (FY2008 : RM2.6 billion) while pre-tax profit increased to RM58.7 million (FY2008: negative RM37.7 million) in part due to increased economies of scale with nine new store openings during the year which added 748,000 sq ft of retail space in total. Also contributing to the sharp rise in operating income were rentals received from the subletting of retail space in its hypermarkets. Operating profit margins continue to improve to 4.5% from 1.1% in FY2008.

However, as a result of the huge capital outlay on new store openings, free cash flow generation has worsened in FY2009 to negative RM493 million (FY2008 : negative RM286 million), and given Tesco Malaysia’s commitment to open at least three to five stores per year, this is expected to deteriorate further. Continuing financial support from Tesco plc for Tesco Malaysia’s expansion strategy has been premised on the latter’s ability to support its interest and profit payments on its borrowings with internally generated cash flows. Tesco Malaysia continues to meet this requirement with net cash flow from operations (CFO) of RM197.9 million (FY2008: RM86.8 million) and a CFO interest coverage 2.3 times (FY2008: 1.9 times).

Tesco Malaysia’s gearing level has remained very high at 40.9 times in FY2009 (FY2008: 49.2 times), with MARC’s rated facility and loans from Tesco plc accounting for the bulk of the borrowings. During FY2009, the company utilised RM1.09 billion under the RM3.5 billion rated facilities in addition to an inter-company loan of RM1.17 billion. The parent company loans mitigate to a certain extent the earlier erosion of shareholders’ funds by operating losses prior to FY2009.

In terms of the financial performance of Tesco plc, revenue has risen to £27.8 billion in the six months ending August 2009 (1HFY2010), from £25.4 billion in the previous corresponding period. Operating margins have improved slightly to 5.77% (1HFY2009: 5.69%) although the pre-tax operating margin has declined due to the sharp increase in borrowing costs. Tesco plc’s total debt has come down to £14.9 billion as of its 1HFY2010 results, from £17.28 billion as at end-FY2009 following a reduction in its capital expenditure (capex) plans. Tesco plc has budgeted £3.5 billion in capex for FY2010 (FY2009: £4.7 billion) and incurred £1.6 billion in capex in 1HFY2010. Management has also entered a number of property sale and leaseback transactions, having concluded £1.3 billion in deals as of October 2009, the proceeds of which have been used to further reduce Tesco plc’s debt levels. 

Tesco plc is the largest grocery retailer in UK, and ranks fourth among global retailers by revenue, with 4,524 stores in 13 countries in 1HFY2010. In addition to retailing in the UK, Tesco plc is also involved in banking, telecommunications, retailing services and online shopping.

Major Rating Factors
 
Strengths

  • Major player in domestic grocery retail market;
  • Improving profitability and strong cash flow generation; and
  • Strong operational and financial support from its parent, Tesco Plc.

Challenges/Risks

  • High gearing levels of parent company; and
  • Growth of the retail industry may be affected by protracted weak economic conditions.
Related