Tuesday tips round-up: Rolls Royce, Tesco
Notwithstanding the impact from the sanctions imposed on Russia, there still seems to be a good business case to be made for shares of Rolls Royce. No, they may not return to the £12.71 per share mark at which the Times’s Tempus tipped them at the start of the year, but they do look “seriously undervalued,” the columnist writes. What most irritated these deeply unforgiving markets about the company’s profit warning was the sharp downgrade to guidance for free cash flow. That was a shock and it is not the first time the firm has sprung a nasty surprise for investors on this front.
FTSE 100
7,895.85
16:59 19/04/24
Rolls-Royce Holdings
395.50p
17:15 19/04/24
Tesco
281.40p
16:59 19/04/24
However, in the medium-term, 2018 to be more exact, cash-flow conversion is expected to hit 80%. Guidance on medium-term margins was also better than some had feared.
As well, power systems and marine engines – the chief cause behind the warning – will return to growth. Unfortunately, the company admits it cannot provide an exact date. On 13 times next year’s earnings and offering a 3% yield “the shares still look like a good long-term bet, although it may take the market time to appreciate it.” The stock is a “long-term buy”, The Times's Tempus says.
Over a disastrous twelve months Tesco has cut its prices by half, those of its shares of course. However, while cheap they may not yet be undervalued given the company’s shaky balance sheet, falling profits and a slashed dividend.
So just what might the value of Tesco shares be at the moment? The stock has a notional floor at 181p per share on the basis of the most recent balance sheet net asset value of £14.7bn, but some of those assets are of dubious value. There are also question marks around Tesco’s supermarket store portfolio. As customers opt to shop at smaller outlets and sales decline the biggest asset on the balance sheet could be hit by a write-down.
As if that were not enough, if the full year pay-out is cut in the same measure as the interim dividend then the annual dividend drops to 3.7p, giving investors a prospective yield of 1.6%. The company can cut spending to offset falling sales and cash flow, but “if Tesco’s problems get worse, it is hard to see how it can avoid an equity raise,” writes The Daily Telegraph’s Questor column.
Lastly, he company’s pricing strategy needs direction, assets need selling and management requires a clear plan.
The shares remain a sell for Questor.