Tesco boosted by Moody's upgrade

With the Tesco share price up c20% this year, there was more good news for investors today with Moody's Investors Service announcing that it has upgraded the Tesco plc credit rating to Baa3; stable outlook.

Moody's senior credit officer David Beadle said, "today's upgrade reflects the improvement in Tesco's operating profit over the last few years and our expectations of continued profit growth, cash generation and debt reduction amidst a challenging and competitive environment,"  We outline below the improvements in key Tesco metrics that have driven the upgrade:

  • Improved balance sheet through deleveraging through a combination of reduced debt and anticipated growth in profits

  • Forward looking analysis of Tesco financials to 2021 show predicted revenue growth of 3%, a 10% reduction in debt and an improved EBIT margin from 3.6% to 3.9%

  • Firmly on track to deliver cumulative cost savings of £1.5bn by 2020 (currently achieved £1.4bn)

  • Improving group profit margin with management reconfirming the FY 2020 target of 3.5 - 4.0% (pre Booker)

  • Strong free cash flow generation of £906m FY 2019

  • Total dividend declared up over 90% from 2018

  • Adjusted gross leverage improved from 5.4x to 4.5x as YOY as at February 2019

  • Adjusted interest cover (adjusted EBIT/adjusted interest also improved from 1.8x to 2.3x