Download - Tesco (2012) Merged Merged
-
8/14/2019 Tesco (2012) Merged Merged
1/45
We initiate coverage of Tesco with a BUY recommendation at
485.50p. Tescos share price was undervalued and we recom-
mended a BUY due to the company potential for continuous
domestic & international growth and development as well as
the tremendous performance over the recent economic down-
turn.
Exceptional Performance over and beyond. The four year period rec-
orded an increasing revenues (7% on average) and comprehensive in-
come. And expected to continue to do so for the foreseeable future.
International Expansion. Borrowings have increased greatly in light of
the reduced interest rate (0.5%) in financing capital (Tesco bank) ex-
penditures and expansion abroad (Mostly Asia).
Tescos courage and strength to survive downturn, and potential to
outperform. With the financial downturn still looming in the economy.
The increase in returns generated on assets coupled with the drop in bor-rowing costs were some of the main contributors for the continuous
growth in return o shareholders.
Dividends on the Rise. Tesco has certainly proved to be successful and
confident in maximising shareholders wealth. Financial year 2011 re-
vealed the 27th consecutive increase in dividends.
FIVE YEAR SUMMARY 406.10p26 February 2011
Summary
Recommendation BUY
Target price (p) 485.50
Shares (millions) 8046
ROCE (E2012) 13.93%
Beta 0.709
P/E (E2012) 2.34
P/B (E2012) 14.12
MV of Or!"ar# $are& (') 32707
ANALYST REPORT
olume 1, Issue 1
TESCOUOB EQUITY REPORT
UNITED IN!DOMARTICLE RESEARC"
University of BirminghamEdgbaston
Birmingham
B15 2TT
United Kingdom
[email protected]#1$#1$%#1&
University ID: 1032971
-
8/14/2019 Tesco (2012) Merged Merged
2/45
Com'a(y O)er)*e+
O-e./*)e o0 Re'or/
Share price movement between Tesco (Blue Line) and
Sainsbury (Red Line) from 20082011
Tesco is the third largest retail company in the world and the largest
British UK retailer - in terms of profit. Tesco has proved to be a
highly successful company as it comfortably operates in other sectors
i.e. health, financial services - apart from its specialty, food and
drinks. It operates globally in around 14 countries and continuously
to gain a fine edge over its competitors (Tesco, 2013) in its ability to
operate profitably, even during recession periods. Appendix 1.1
summarises Tesco SWOT analysiswhich reveal its strengths, weak-
nesses, opportunities and threats.
This report will examine and analyse the financial state-
ment for Tesco for the past five years - 2008 to 2012
(including 2012E forecast). This report is divided into
three different sections for full detail breakdown for
a n a l y s i s a n d i n t e r p r e t a t i o n p u r p o s e s .
The first section of the report will analyse Tescos finan-
cial performance (Credit status and ROCE - profitabil-
ity) over a four year period through the use of various
useful financial analysis tools such as ratio analysis and
common size analysis, in order to give a clearer trans-
parency on Tescos performance. Tescos ratio perfor-
mance will be analysed and compared with that of one
of Tescos peer and major competitor - Sainsbury J Plc
and the industry mean average where ever possible
from a reliable source (industry average as at
26/02/2011 - Thomson One Banker) - Appendix 3.3.
The second section will involve the exercise of using the
common size analysis, analysts projected revenue figure
(2012E) and CAGR model to forecast the financial posi-
tion and performance (Income Statement) of Tesco into
its fifth financial year (2012) - this will be compared
with its actual 2012 performance. In addition, I will uti-
lise the annual compound growth model in order to form
my perspective on Tescos forecast income statement.
Finally, the final section will attempt to calculate the -
(Tesco, 2013)
- companys forecasted value of equity per share at the
end of the fourth -financial year by using one equity val-uation model (the Residual Earning model).
Page 2Volume 1, Issue 1 ID: 1032971
-
8/14/2019 Tesco (2012) Merged Merged
3/45
In order to make an effective equity analysis of Tescos financial position and performance through the use of ratio
analysis, the financial statements (i.e. Income statement) were reformulated. Reformulation separates the operating
and financing items in the financial statement, compared to the traditional credit analysis which classifies them into
current and long term categories (Penman, 2010). Penman (2010) reveals that a benefit of reformulation allows addi-
tional information to be brought from footnotes.
The profitability analysis (ROCE) is broken down into three distinct levels. The first level is the separation of operat-
ing and financial profitability and the effects of leverage. The second break-down level are the drivers of operating
profitability. Finally, the third level containsProfit margin drivers, asset turnover drivers and analysis of Net bor-
rowing cost.
I will evaluate the three break-down levels of profitably (excluding the full break-down analysis of net borrowing
cost - due to lack of sufficient information in the annual reports). In addition to these ratios, I will also calculate oth-
er Credit ratios to assist in solidifying my analysis.
Reformulation
!e "nalysis of Profitability #Ratios$
Ratio analysis for TESCO PLC:
Ratios (Level 1 & 2) Abbreviations 2008 2009 2010 2011
Return on Common Equity ROCE 0.21 0.14 0.15 0.17
Return on Net Operang assets RNOA 0.13 0.08 0.11 0.12
Operang ro!t "argin PM 0.05 0.04 0.05 0.05
Asset #urno$er A#O 2.44 2.13 2.28 2.35
%inan&ia' (e$erage %(E) 0.*3 0.+* 0.70 0.5*
Net ,orro-ing Cost N,C 0.001 0.01 0.04 0.03
RNOA N,C 0.13 0.07 0.07 0.0+
%(E) / RNOAN,C 0.08 0.07 0.05 0.05
Operang (e$erage OLLEV 0.51 0.*4 0.71 0.74
Ratio analysis for J SAINSBURY's:Ratios (Level 1&2) Abbreviations 2008 2009 2010 2011
Return on Common Equity ROCE 0.14 0.0+ 0.10 0.12
Return on Net Operang assets RNOA 0.11 0.04 0.08 0.10
Operang ro!t "argin PM 0.04 0.02 0.03 0.03
Asset #urno$er A#O 2.53 2.87 2.7* 2.7*
%inan&ia' (e$erage %(E) 0.43 0.50 0.4* 0.41
Net ,orro-ing Cost N,C 0.04 0.05 0.01 0.02
RNOA N,C 0.07 0.0+ 0.0* 0.07
%(E) / RNOAN,C 0.03 0.05 0.03 0.03
Operang (e$erage OLLEV 0.42 0.50 0.47 0.4*
Page 3Volume 1, Issue 1 ID: 1032971
-
8/14/2019 Tesco (2012) Merged Merged
4/45Page %Volume 1, Issue 1 ID: 1032971
!e "nalysis of Profitability #&ont'($
0.15
0.1
0.05
00.05
0.1
0.15
0.2
0.25
2008 200+ 2010 2011
ROCE(%)
Year
ROCE (200*2011)
#es&o
3ainsurys
ROCE movements of Tesco & Sainsbury's between the four year period.
ROCE(profitability) for Tesco and J Sains-
bury's were positive over the four year peri-
od - except for Sainsburys in 2009 where
their profitability was negative. In 2009,
Tescos profitability also declined. However,
for both company after 2009 there was
steady growth in their ROCE. The decline of
ROCE in 2009, could have been due to the
aftershock of the credit crunch and after this
year there was improvements. We would
need to break down the ROCE into different
levels in order to evaluate in detail and try to
explain their respectively effects on the over-
all ROCE.
RNOA for both retailers were growing steadily after 2009, although
Sainsburys experienced a negative RONA in 2009 (Tesco also expe-
rienced a fall in this ratio in 2009). It seems as though the recession
affected Sainsburys more than Tesco even though they operate in the
same industry - Tesco are the market leaders in the UK market and are
able to resist the shocks of downturns in the economy better than its
competitors. In Tescos defence for the fall in RNOA in 2009 was due
to the decline in Operating Income in comparison to 2008. The causes
of this must have been the losses on the benefit pension scheme and
foreign currency translation differences. During this time the globalmarket was still unstable and losses were made on investments and
overseas transactions.
Sainsburys had a negative Operating Income in 2009, although they
were able to cover their cost of sales - other costs exceeded their in-
comes. In addition to the negative impact on RNOA was the losses
made on pension schemes and lower finance income subsequently in
2009 for J Sainsburys.
Operating Profit Margin (PM) was rather stable for both retailers
in years 2008, 2010 & 2011 - apart from in year 2009 where both
company had a decline in PM (negative in the case of Sainsburys).
Although both retailers had an increased revenue in all four years the
operating margin does not seem to be influenced favourably. One
reason for the fall in this ratio in 2009 was due to the reason stated
above (RNOA). During the rest of the other years, the stability in the
ratio was caused by price wars during the recession periods. Other
retailers such as Morrison's and Asda were forced to drop their price
in order to compete. This explains the continuous rise in revenue, but
also a proportionate rise in costs means the ratio is kept rather steady.
Asset Turnover (efficiency) for Tesco and
Sainsburys averages at 2.30 and 2.73 re-
spectively. Over the four year period it has
been fairly stable. Even though 2009 has
been the main focus when analysing the oth-
er ratios. Surprisingly there was an adverse
impact on Tesco ATO while J Sainsburystriumphed during 2009. Although Tesco gen-
erated a much higher revenue than Sains-
burys during this particular period, it can be
concluded that Sainsburys were more effi-
cient in using their Net Operating assets to
generate revenue - Tesco were inefficient. It
is evidently clear from various sources that
Tesco adopted a low-cost strategy especially
during 2009. This must have trigger an antic-
ipatory increase in demand and subsequently
sales. Looking at the cash flow statement
(Cash Investment) Tesco therefore invested
heavily, the highest investment over the four
year period - especially the extensive pur-
chase in PPE and Investment property. Sains-
burys on the other hand invested less in
PPE. Thus if Tesco ought to improve their
ATO they needed to recognise cautious peri-
-
8/14/2019 Tesco (2012) Merged Merged
5/45
- ods so investing in operating assets could
be minimised. The analysis of both retailers
level three break-down for ATO drivers
(Appendix 1.2) looks fairly similar - PPE
and Inventory turnover dominating the over-
all ATO ratio.
FLEV (Financial Leverage) - Tesco were
much more highly geared in comparison to
Sainsburys. Especially in 2009 FLEV ratio
for Tesco was at 0.96 while Sainsburys
stood at 0.50. The reason for the high gearing
is due to the dramatically fall in interest rates
to 0.5% in 2009 (BBC News, 2013) in the
UK and also Asia (Japan). The government
made it relatively easier to borrow funds in
order to stimulate the economy. Tesco took
advantage of the historic low interest rate
drop while Sainsburys, still played very cau-
tiously. During this year Tesco borrowed
16,450m (highest over the four year period
in comparison to the previous year -
8,056m. After this year borrowings in 2010
& 2011 didnt drop as far to 2008, rather
stayed close to 2009 borrowings.
On the other hand, Sainsburys increased
borrowings from 2008 to 2009 was 129m
compared to Tesco 8,394m. In my opinion
Sainsburys could have been reluctant to bor-row due to the unstable financial markets.
Although, borrowings are cheap it can bring
financial distress to the firm. However, on
the positive aspects of extra funds to support
operations, according to Modigliani
and Miller's models (Arnold, 2012) an in-
crease in borrowings lead to a potential in-
crease in returns to shareholders.
0
5000
10000
15000
20000
2008 200+ 2010 2011
'M
YE+R$
,O,+- BORRO.$ (200 *
2011)
#es&o
ainsurys
Net Borrowing costs (NBC) - effective cost of borrowings
for Tesco was lowest during 2008 and 2009 and a sudden
increase in 2010, followed by a drop in 2011. Unlike, for
Sainsburys its NBC ratio was highest during 2008 and
2009 and lowest during 2010 and 2011. From the Chart
above and the line graph below are connected and it ex-
plains clearly why both retail firms experienced differences
in their Net borrowing costs. In 2010, Tescos finance costs
were at the highest over the four year period as outstand-
ing borrowings increased in the previous year. But in 2011,
when borrowings started to decline, this is reflected on the
NBC ratio - as financial costs also started to drop.
In the case of Sainsburys, finance costs rose steadily over
three years and dropped to its lowest in 2011. Its NBC ra-
tio was expected to drop in 2011 as finance costs declined..
0.000
0.010
0.020
0.030
0.040
0.050
2008 200+ 2010 2011
(%)
Year&
BC (200 * 2011)
#es&o
ainsurys
Profitability "nalysis #&ont'($
Page )Volume 1, Issue 1 ID: 1032971
-
8/14/2019 Tesco (2012) Merged Merged
6/45
Profitability "nalysis #&ont'($
Page 6Volume 1, Issue 1 ID: 1032971
Operating Liability Leverage - Overall
Tesco proclaimed a higher average OLLEV
ratio in comparison to Sainsburys. This
simply could be due to the fact that Tesco are
a bigger group and generate more revenue
and therefore more operating liabilities.
Tescos OLLEV seems to continue growing
over the four years. While, j Sainsburys
OLLEV are falling after its peak in 2009.
Tescos higher OLLEV seems as though its
not of concern as its generating more revenue
each year to cover its operating liability.
However while analysing the cash flow state-
ment (the bar chart on the right), there was
decrease in cash in two years and a subse-
quent increase in 2010 & 2011. Tesco might
have found it rather difficult to pay the liabili-
ties falling due in 2008 and 2009 because of a
loss on cash.
Sainsburys OLLEV peak in 2009 was partly
due to a gradual increase in Trade and other
payables and a lower NOA figure. Sains-
burys also experienced a steady sales
growth, however in three out of the four year
period delivered a decrease in cash. In thiscase, it seems like good news that their
OLLEV is falling. But if it falls too much, it
might impact adversely on sales.
instead it rose again. This was due to a slight decline in borrowings and increase in Financial As-
sets.
Operating Spread (SPREAD) (RNOA>NBC) - was favourable during the four year and three year (08 10 and
11) period for Tesco and J Sainsburys respectively, where Positive spread is likely to generate higher return for
shareholders as it suggests that the company earns more on its operating assets than its borrowing costs. Sainsburysearned a negative spread in 2009 - as (RNOA
-
8/14/2019 Tesco (2012) Merged Merged
7/45
Along with the profitability ratio and its break-down, I will utilise other commonly well known credit rati-
os to evaluate the performance of my chosen company (Tesco's) and its fierce competitor (J Sainsburys).
Debtors Days - On average, Sainsburys has a much shorter debtors days in comparison to Tesco
and the industry average (11.48 days). The impact of a shorter debtors days would mean a more
healthy cash flow for J Sainsburys. However, less sales on credit for Sainsburys customers thus; this
strategy may have limited additional potential revenues that could have been gained. While in the
case of Tesco seems to be offering more sales on credit to customers should lead to improvements in
revenue, but could also increase the likelihood of bad debts. The strategy based on how much sales
credit is offered depends on both retailers management (cash flow to sales ratio is the closest to reveal
an insight into this). Over the four year period, debtors days for Sainsburys seem rather stable, while
Tescos ratio continues to rise steadily. Reason for the rise could be due high levels of unemployment
during economic downturn and offering more credit sales to attract more these type of customers.
Creditors Days - Sainsburys has lower creditors days compared to Tesco over the four year period. This isnt much
of a surprise as Tesco are the market leader, price setters and have the ability to obtain large economies of scale,
hence obtaining better payment terms with suppliers. Tesco can be seen to have a much higher bargaining power than
that of its competitors. As these days increases over the four years, the better cash flow is expected to be. Tesco are
taking longer to pay its suppliers than J Sainsburys. Tesco have succeeded in maintaining good relationship with its
suppliers as stated in its mission statement, in order to improve their chances of maintaining better contracts from
suppliers (Clark, 2010). Sainsburys have a similar believe in maintaining closer relationship with its suppliers, but
this is not reflected from this ratio. Because over the four years creditors days seems to be decreasing.
Ratio analysis for TESCO PLC:
Cre!t $tat& Ra5o& 2008 2009 2010 2011
Cre6itors ays *0.82 *2.08 *5.8+ *8.4+to& #urno$er ays 20.31 1+.44 1+.04 20.**
Current Rao to 1 0.*1 0.78 0.73 0.*7
9ui& Rao to 1 0.38 0.*3 0.5* 0.4+
etors ays 10.12 12.08 12.11 13.8*
:nterest Co$er mes 11.4* *.+4 *.03 8.01
;ross ro!t "argin
-
8/14/2019 Tesco (2012) Merged Merged
8/45
"nalysis of &re(it *tatus #&ont'($
Page -Volume 1, Issue 1 ID: 1032971
0.00
0.20
0.40
0.*0
0.80
1.00
2008 200+ 2010 2011
Rat!o
Year&
,e&o (C4rre"t 6 74!8 Rat!o)
Current Ratioto 1
9ui& Ratioto 1
0.00
0.10
0.20
0.30
0.40
0.50
0.*0
0.70
2008 200+ 2010 2011
Rat!o
Year
9 $a!"&:4r# (C4rre"t 6 74!8 Rat!o)
Current Ratioto 1
9ui& Ratioto 1
Current Ratio - Looking at the charts, in general
Tesco and Sainsburys are not holding enough
current assets in order to cover their current obli-
gations. Tescos current ratio are higher on aver-
age (0.7:1), compared to Sainsburys (0.61:1) &
industry (0.6:1 - Year 2011). Sainsburys current
ratio looks to be fluctuating over the four years,
while Tescos ratio seems to increase in 2009 and
starts to drop steadily again in 2010 & 2011.
Again, in reference to 2009 it is thought to be a
difficult year for all retailers in this industry.
However, it attained the highest current ratio in
comparison to all other years due to the fall in
interest rate and in turn Tescos borrowings to
increase cash held. This in turn increased current
assets and in turn favoured the ratio. In addition,
Tesco might have needed the cash in order to sur-
vive in the short-term during 2009. Because after
2009, the cash held by Tesco (Statement of Finan-
cial position) started to decline; having studied
their statement of financial position, some of these
cash were used for Investments.
Quick Ratio - my calculation of quick ratio is the
ability for the firm to survive excluding stock.
Also this ratio gives an insight as to how reliant
the retailers are on stock. Once again by looking
at the illustrations, Tesco seems to rely more on
stocks in 2008 in comparison to other years.
Through a deeper analysis, Sainsburys relied on
stock the most in 2011 and relied less on stock in
2009 - as the difference between the current ratio
and quick ratio revealed this insight. It comes as
no surprise that in 2011, thats when cash held by
Sainsburys was at its lowest over the four year
period. Does this suggest confidence from Sains-
burys in their stocks to sell within one year, andprojected prediction for better revenue in years to
come? I personally think this is true as the econo-
my gets better. However, in 2011 industry...
Stock Turnover - Sainsburys has a much lower stock turnover
days than Tesco and the industry average (23 days) - both aver-
aging at 14 and 20 days respectively. Both retailers did better
than industry average. Tesco took six days longer to replenish
its inventory, compared to J Sainsburys. This is mainly due to
the fact that Tesco holds more stocks than Sainsburys as they
expect more demand, therefore takes longer to sell. Both retailer
ratios seems rather steady. This is the case, if other functions of
the organisation (such as marketing) have done their market re-
search well enough to know how much demand they are expect-
ing, in order to be able to hold the right amount of stocks they
are able to sell. However, if these stocks are piled up as demand
has been wrongly forecasted, costs can be incurred to the retail-
ers - i.e. storage costs.
Both retailer seems to have succeeded to a certain degree in
forecasting the demands for its goods. Because over the four
year period stocks are increasing for both retailers and the ratio
remains fairly constant.
...average stood at 0.31:1.
-
8/14/2019 Tesco (2012) Merged Merged
9/45
"nalysis of &re(it *tatus #&ont'($
Interest Cover - Tesco had a higher interest
cover than Sainsburys in each year over the
four year period. In 2008 Tesco had a high
twelve times interest cover. In 2010 Tesco ratio
fell due to higher finance costs (579m), this
must have been due to the increased in borrow-
ings in 2009 (refer to borrowing chart in previ-
ous pages). It makes sense for the ratio to be
adversely affected, especially if the borrowings
in 2009 was a short-term borrowing (< 1 year)
and it falls due in 2010. If this ratio was part of
the determinants in dividends policy by Tesco
directors in this particular year; hypothetically
ordinary shareholders are less likely to receive
dividends - but dividends was actually received.
Sainsburys had a lower interest cover rate com-
pared to Tesco simply because Tesco had a
higher Operating Income before Interest. In
2011, the Interest Cover ratio for Sainsburys
was at its highest over the four year period be-cause the finance cost was at its lowest over the
four year period. One reason is because Sains-
burys reduced its short-term borrowings in
years 2010 & 2011 dramatically. It is unclear as
to why this strategy was implemented, even
when interest rate was still low (0.5%). More
positively, Operating income before interest in-
creased during 2011.
0.00
2.00
4.00
*.00
8.00
10.00
12.00
14.00
2008 200+ 2010 2011
Co;er(,!
e&)
Year&
/"tere&t Co;er (200 * 2011)
#es&o
ainsurys
0
50
100
150
200
2008 200+ 2010 2011
('M)
Year&
$*, Borro
#es&o
ainsurys
Although revenue improved gradually over the these period, the
rate at which cost of sales was increasing was faster than the rate
in which revenue was increasing. This adversely impacted on
the ratio. In the fourth year Sainsbury performed below the in-
dustry benchmark
The fall in gross profit shows that maybe Sainsburys are not
bargaining for the lowest costs when purchasing from suppliers
or they were not willing to switch to a more cheaper supplier.
Page 9Volume 1, Issue 1 ID: 1032971
-
8/14/2019 Tesco (2012) Merged Merged
10/45
"nalysis of &re(it *tatus #&ont'($
The reason was because the rate of inflation in
the UK from 2008 to 2009 fell from 3.2% to
2.2% (BBC News, 2013). This is expected to
deliver a lower cost of sales in proportion to
sales, but instead the gross profit margin de-
clined. Furthermore, Inflation rate in 2011 rose to
4.5%, this is expected to adversely affect the
Gross profit ratio, but instead gross profit im-
proved during this year in comparison to previ-
ous years (2009 & 2010). This should be further
investigated, as it illustrates some inconsisten-
Cash flow to Assets measures the efficiency ofthe retailers. How well each company use their
assets in producing cash from operating activities
This ratio for Tesco was very unstable over the
four year period. This is affected through the
buying and selling of fixed assets in responds to
growing cash from operating activities in years
2008, 2009 & 2010. Tesco were very efficient in
2008. However, in 2011 where total assets was at
the highest over the four year period, the ratio fell
to its lowest. This indicates inefficiency from
Tesco during this year, as less cash from opera-
tions were produced in comparison to 2010, even
when there was more assets.
Sainsburys ratios likewise were quite volatile
over the four year period, with it being least effi-
cient in year 2011. Although there were more
assets, Sainsburys achieved less cash from oper-
ations in comparison to year 2009 & 2010. In
these years (2009 & 2010) they were more effi-
cient compared to 2011.
Cash flow to sales measures the proportion of cash from operat-
ing activities to sales. Using this ratio, it gives a slight insight
into the cash sales offered by each retailer. Tesco experienced an
improvement in this ratio during the first three years, and a de-
cline in 2011. The main reason was due to the fact that there was
a decrease in cash from operations during 2011, even when reve-
nue continued to grow. We can conclude to an extent Tesco of-
fered more credit sales during 2011, which has impacted the cash
from operations. To fully conclude on the specific cause of the
ratio, Tesco credit sales policy to customers needs to be scruti-
nised in depth to bring some other facts to light.
Sainsburys cash flow to sales ratio similarly followed Tescos
ratio trend. Although revenue improved over the years, cash from
operations decreased. Tesco and Sainsburys could have both
used this strategy (more credit sales) to attain more revenue.
Tesco performed above the industry average of 5.66, while Sains-
burys this ratio.
0
1000
2000
3000
4000
5000
*000
2008 200+ 2010 2011
('M)
Year&
Ca&% fro Operat!"= +t!;!t!e& (200
* 2011)
#es&o
ainsurys
0
10000
20000
30000
40000
50000
2008 200+ 2010 2011
'M
Year&
,O,+- +$$E, (200 * 2011)
#es&o
ainsurys
Page 10Volume 1, Issue 1 ID: 1032971
-
8/14/2019 Tesco (2012) Merged Merged
11/45
This aim of this second sectionis to be able to calculate Tescos forecasted value of equity per share at the end of
the fourth year (2011). Through this I am able to give my own opinions based on the calculated value of Tesco and
thus advice my clients as to their next course of action - Buy, Hold or Sell Tesco shares.
I believe that the Residual Earnings model was the best choice in valuing the share price of Tesco Plc as the share
price valuation derived from this formula will be compared to actual share price of Tesco as at 26th February 2011.
During this process, I utilised the use of the Compound Annual Growth Rate (CAGR) model. I chose this
model in forecasting year 2012 Revenue, as it incorporates growth rate changes from year to year throughout the
four year period and eliminates and smoothen volatile rate changes (by providing a rate as a result). Beginning val-
ue = 2008 Revenue figure & Ending value = 2011 Revenue figure.
The rate that was derived (6.54%) from the CAGR formula was multiplied by the revenue for 2011 to obtain my
revenue prediction (64,916m). However, the revenue prediction does not include much macroeconomic infor-
mation and the calculation was based on past data. I found a way to incorporate analysts revenue figures before I
arrive at my final Revenue. Analyst are specialists in the monitoring companies and experts in finance field and they
would have take numerous accounts of macro economical information the CAGR model hasnt taken into considera-
tion. Therefore, I worked out an average between four figures that includes the three individual analyst revenue fig-
ures along with the CAGR model revenue prediction (64,916m) - this resulted in my final Revenue (65,773m)
that takes account of CAGR and macroeconomic factors. Below explains the process behind my theory.
C+R Moe> Rate *.54*4?+1*
+"a>#&t Re;e"e&
@niCre6it >*4?+43
C=ar'es tan'ey >*7?500
E$o'uon e&uries >*5?734
?!"a> +;era=e Re;e"e '6@A773
CAGR Formula - INVESTOPIDIA a, 2012
My predicted Revenue was surprisingly close to the actual 2012 Revenue. The next process was to be able to calcu-
late the cost of equity as this will be needed for the calculation of Tescos share price through the Residual Earnings
m o d e l .
I obtained twenty-four years worth of Tesco share price and FTSE ALL SHARE Price Index. I calculated returns
from the price indexes for both Tesco and FTSE ALL SHARE from DataStream. This enabled me to draw a re-
gression analysisand to be able to obtainBeta(Appendix 1.3).
Coefficients
StandardError t Stat P-value Lower 95%
Upper95%
Lower95.0%
Upper95.0%
Intercept 0.005649666 0.00317605 1.778834 0.076325 -0.000601639 0.011901 -0.0006 0.011901
X Variable 1 0.709382196 0.063222352 11.22043 1.82E-24 0.58494391 0.83382 0.584944 0.83382
From the result analysis Summary Output, the figure that is circled is the BETA and this was used with CAPM to
calculate the Cost of Equity Beta measures the sensitivity of Tescos stock in relative to market changes. From
this figure (0.709) - Tesco is not very sensitive to changes in the market environment, this truly reflects the compa-
ny.
Page 11Volume 1, Issue 1 ID: 1032971
Foreasting an( *!are Prie Valuation
-
8/14/2019 Tesco (2012) Merged Merged
12/45
Foreasting an( *!are Prie Valuation #&ont'($
Page 12Volume 1, Issue 1 ID: 1032971
CAPM is a model that describes the relationship between risk and expected return and that is used in the pricing of
risky securities. (Investopidia b, 2012).
Calculation: cost of equity, ke
CA" R gi$en equity eta "t ris premium equit eta / "t ris premium
4.20< 0.70+3821+* 0.054* 0.0387322*8
ke 8.07