Tesco’s sales and profits are ahead of expectation, and TUI lines up €1.1 billion rights issue

“A continuing surge in energy prices means the sceptre of inflation is looming large over the markets again with the FTSE 100 down more than 1% in early trading,” says AJ Bell investment director Russ Mould.

“Oil prices are camped above $80 per barrel after producers’ cartel OPEC failed to increase output and natural gas continues to touch record highs. The concern will be that rising prices will prove much stickier than hoped.

“This is undermining the markets’ efforts to pick themselves off the canvas after a bruising autumn so far. The next big announcement on the radar is the US jobs report on Friday – a weak number could prompt concern that we are heading for the dreaded stagflation scenario.”

Tesco

“Tesco went above and beyond to serve the nation during the pandemic, and it is reaping the rewards now.

“The supermarket is doing remarkably well if you consider it is now lapping an incredibly busy period for the company. Its 2020 half year to the end of August included the time when large parts of the nation raced to stockpile goods and many people had no choice but to try online grocery orders for the first time. Tesco excelled at being able to give people the delivery slots they needed.

“A year on, sales are higher still as it has grown market share. Food price inflation may have contributed to higher sales, so too will have a recovery in activity for wholesale division Booker. The fact that operating profit is shooting ahead shows that Tesco is dealing with its own cost pressures very well.

“Christmas is going to be a testing time for the business, given how there are fears of product shortages during the festive period. Tesco is going to have to keep a close eye on stock availability and to make sure its stores don’t have gaping holes on the shelves. But the company should be feeling a lot more comfortable about dealing with such pressures given how it did so well during the pandemic.

“It has greatly strengthened its online delivery capability and managed to keep a gigantic business running like clockwork during one of the most disruptive times for business in history. The pandemic was almost the ultimate test for how efficiently a business can run during times of stress and Tesco graduated with flying colours.

“The decision by Tesco to buy back shares makes sense. Its share price has been left behind in the recovery from the global market crash in February and March 2020, despite the business having made considerable gains strategically. Management clearly take the view that the shares are too cheap at the current level, so buying some back is a good way to deploy spare cash.”

TUI

“Travel operator TUI is back to the market with its begging bowl out again. Not for the first time in this crisis the slow return to normality for tourism is causing problems, putting more strain on its balance sheet than an elephant on a tricycle.

“The assumption through the pandemic has been that TUI would never go to the wall, despite a very messy balance sheet, because the German authorities would always step in to bail it out.

“However, the state-backed loans it received weren’t handouts, they do need to be paid back hence the need to go out and raise more funds through a rights issue.

“With 32% shareholder the Mordashov family planning to take up its full entitlement the issue has a good chance of being well supported.

“The question is whether TUI is raising enough. Chief executive Fritz Joussen talks about taking a ‘significant step closer’ to repaying its debts with the government, but it could risk alienating shareholders if it has to return once more with its hand out.

“At least the company is able to point to a recovery in bookings as restrictions are eased, although given lingering uncertainty associated with the pandemic, guidance for the 2022 summer season to return to pre-pandemic levels may be treated with understandable caution.”

These articles are for information purposes only and are not a personal recommendation or advice.