Two FTSE-100 Listed Rationally Performing Companies Amid Coronavirus Uncertainty: DS Smith PLC and Tesco PLC

During this unprecedented time, economies are impacted across the globe, whereas many FMCG and grocery retailers are witnessing increased demand and remain resilient and faced relatively limited impact from Covid-19 outbreak. Today, we will discuss the preliminary results performance reported by DS Smith PLC and Tesco PLC.

DS Smith PLC (LON:SMDS)

DS Smith Plc is an FTSE 100 listed company, which provides packaging solutions. It operates in 37,000 countries with over 31,000 people. The group was established in London by the Smith brothers in 1940. Currently, their corrugated packaging business spans across Europe with one centre in North America.

Supply Cycle Strategists

For a sustainable model, it manufactures paper (corrugated case material from recycled fibre, including old corrugated cases and from pulp) and runs a recycling business to source fibre. It also holds a large network of major retailers and industrial companies from where they get a raw idea for consumer trends, and with their insights through nine impact centres, they aim to serve the cost-effective packaging. For innovation, there is a programme in place called ‘PACE’. By using their proprietary technology, they serve with bespoke solutions through the strength of the lightweight corrugated board. For designing, they leverage a network of 36 PackRight Centres to provide the optimum solution.

(Source: Annual Report, Company Website)

Redefining Packaging for a Changing World

DS Smith aspires to become the leading supplier, with sustainable packaging solutions. Their purpose is to redefine packaging solutions by:

• Providing tailored solutions.
• Bringing convenience and choice without harming the environment.
• Finding innovative and flexible solutions.
• Optimal use of the material and recycle within 14 days.
• Expanding footprints through acquisitions in greenfield sites.

(Source: Annual Report, Company Website)

Recent developments for Long-run Impact

• 26^th March 2020: The group has announced that its financial director, Adrian Marsh has reinstated its position and will not be joining William Hill PLC.
• 27^th February 2020: Announced the disposal of its Plastics division to Olympus Partners for consideration of nearly £400 million.
• 26^th February 2020: Appointed Dr Susana Aucejo as senior R&D Director, for leading plastics replacement activity.

Trading Update – Reflecting Resilient Performance during COVID-19

• Due to the relatively limited impact from coronavirus, the company’s trading update on 4^th March 2020 has remained resilient. But on 8^th April 2020, the company has released its trading update in respect of the COVID-19 scenario. The company stated that its priorities remained to look after the safety of the partners, staff, and the communities as well as ensuring good levels of client service.
• From the perspective of demand, corrugated box volumes have continued to be good, and the business has also shown an improvement in the first half on LFL (like-for-like) basis, with the emphasis on the FMCG client base, despite uncertainties. Mostly, all the regions are less impacted or remained relatively robust; however, the Southern Europe region was highly impacted by COVID-19, which includes the markets of France, Italy, and Spain.
• For the grocery sector, Supplies have been very busy. In most categories, e-commerce has also been robust, specifically in everyday essential products. However, the industrial sector has been heavily affected, driven by a given uncertainty.
• Moreover, DS Smith has a high cash generative business model and the liquidity profile, and the balance sheet is reflecting strong performance, with no significant refinancing required until 2023 and £1.4 billion of facilities presently undrawn. The company expect the net debt to EBITDA ratio to be approximately in the medium-term target of 2x on 30^th April 2020.

Share Price Performance

Daily Chart as of April 8^th, 2020, before the market close (Source: Thomson Reuters)

SMDS’s shares, at the time of writing before the market close (at 8:52 AM GMT) on 8^th April 2020, were trading at GBX 295.40. Stock's 52 weeks High is GBX 397.80 and Low is GBX 244.80.

Business Outlook

Led by this backdrop (COVID-19), the management has decided that they will not pay the interim dividend, which was supposed to be paid on 1st May 2020. The company’s trading environment has shown decent performance, with the focus on e-commerce and FMCG customers. Despite the very challenging environment, the company is encouraged by the performance of the business. This also shows that the company continue to work with the suppliers and customers, which will ensure delivery of essential supplies. However, the group is taking a prudent approach to capital allocation and cost until there is better certainty in the macro-economic outlook.

Tesco PLC (LON:TSCO)

(Source: Presentation, Company Website)

Tesco is an FTSE-100 listed multinational grocery retailer, which is catering millions of customers every week with a workforce of nearly 450,000 and over 6,800 stores.

Strategic Drivers

• Brand differentiation to create long-term value.
• Cost efficiency for sustainability.
• Significant cash generation and robust working capital management.
• Remain competitive by focusing on profitable ventures.
• Expanding the stores’ portfolio.
• Innovation pipeline to meet customer’s needs.

Six Key Performing Indicators to Measure the Whole Business

• Sales Growth
  • Growth in sales signifies underlying performance opportunities for supplier.
  • Group sales surged by 11.3% in FY 2019 (against FY 2018).
• Profitability
  • Imperative for sustainable growth and value creation for all stakeholders.
  • The Operating profit (before exceptional items and amortization of acquired intangibles) grew 33.5% in FY 2019 (against FY 2018).
• Improving Operating Cash Flow
  • Measured cash generation ability and working capital efficiency.
  • Generated operating cash of £2,502 million in FY 2019 (fell by 9.8% versus FY 2018).
• Net Promoter Score
  • Reflects customer satisfaction and retention value.
  • Rose by 5 points to 17 points in FY 2019.
• Working Conditions
  • 450,000 colleagues recommending Tesco as a great place to work.
  • Remained flat at 83% in FY2019 (compared to FY 2018).
• Partnership Building
  • Growth in partnership with suppliers enables Tesco to provide best product at the fair price.
  • The supplier satisfaction rate stood at 77.5% in FY 2019 (2.6 points up from FY 2018).

Recent Actions Reflecting the Company’s Vision

• 31^st March 2020: Tesco has provided £30 million package to support local communities battling the Coronavirus outbreak.
• 9^th March 2020: The group announced the disposal of their Thailand and Malaysia business for a consideration of $10.6 billion to CP Group entities. The group intends to distribute £5.0 billion in return to shareholders as a special dividend.
• 25^th February 2020: Announced disposal of 20% share in Gain Land for net cash proceeds of nearly £275 million, to China Resources Holdings (its joint venture partner).

(Source: Presentation, Company Website)

Decent Financial Performance for FY20, Despite the Challenging Environment

• Before going to the results for the financial year ending 29^th February 2020, we would like to update regarding the impact of COVID-19 on the company’s performance. Due to this backdrop, the group has shown resilient performance in the UK region. The significant panic buying (30 per cent uplift in the UK) cleared the supply chain of certain items during the first few weeks of the crisis. While in Grocery Home Shopping, the company has already stepped up the capacity by over 20%.
• Group statutory revenue, includes fuel sales of £7.4 billion, increased by 1.3% to £8 billion in FY20, while headline group sales were down by 0.7%. The group operating margin increased by 56bps to 4.65% in 2020. On a 53-week basis, the statutory profit before tax and diluted EPS decreased by 18.7% and 26.8% respectively, in the current year.
• Including £277m from the sale of China joint venture and CE property disposals of £167m, the retail free cash flow increased to £2,063 million in 2020 from £889 million in 2019. Led by the robust liquidity and balance sheet, and the strength of last year’s performance, the final dividend per share was 6.5 pence. On a year-on-year basis, the net debt was down by £1 billion.

(Source: Annual Report, Company Website)

Share Price Performance

Daily Chart as of April 8^th, 2020, before the market close (Source: Thomson Reuters)

TSCO’s shares, at the time of writing before the market close (at 8:55 AM GMT) on 8^th April 2020, were trading at GBX 218.80. Stock's 52 weeks High is GBX 260.40 and Low is GBX 203.70.

Outlook – Decent Position in All-Divisions, Except Bank Division

COVID-19 is having a significant impact on the operations of the business. While the company is expecting the impact of this crisis to reflect in the financial year 2021, with a high degree of certainty. The impact on the retail cost lines will be in the range of £ (650)-£ (925) million, which includes significant cost uptick in payroll, distribution and store expenses. If these sentiments will be normal until August 2020, it is possible that the additional cost headwinds would be incurred in the retail operations. Tesco Bank is projected to be impacted by a decrease in income from all its activities. If this uncertainty persists for some time, then the group is expecting a loss from the Bank division in FY21. The Bank’s capital ratio and liquidity are expected to stay robust.

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