NAME: AFTAB ALI KHAN STUDENT NUMBER: 049000887/BE2AKH MODULE NAME: FINANCIAL MANAGEMENT MODULE CODE: APC 308

LEVEL: 3 MODULE LEADER: BOB STRADLING SUBMISSION DATE: 11TH JANUARY 2008

TABLE OF CONTENTS

SUMMARY

INTRODUCTION Tesco is one of the world's leading international retailers. Since the company first used the trading name of Tesco, in the mid 1920s, the group has expanded into different formats, different markets and different sectors. Tesco has a long term strategy for growth, based on four key parts: growth in the Core UK business to expand by growing internationally to be as strong in non-food as in food and to follow customers into new retailing services. WEBSITE: TESCO UK CITED 22/12/2007 Tesco PLC is listed on the London Stock Exchange, with ticker symbol TSCO and has a Level 1 OTC American Depositary Receipt (ADR) Programme in the United States, with ticker TSCDY. FINANCIAL ANALYSIS

SALES GROWTH The constant increase in sales, hence operating profit, is an evidence of Tescos good corporate strategies. Group Sales of Tesco increased by 10.3% i.e. 33.9bn from 30.8bn (between 2003 and 2004). The sales figure by the end 2006 stands on 39.4bn. UK Sales improved by 9.6% 27bn (2005) from 24.7bn (2004).

Sales in rest of Europe went up by 12.8% to 38bn (2006) from 33.8bn (2005) Sales in Asia also rose up to 12.8 % 30bn (2005) from 26.6bn (2004). Total Non food sales showed 17.6% progress from 5.1bn (2003) to 6bn (2004).

COMPETITOR Tesco has shown good progress against its competitors which is again proves the success of its policies and decision making. The following chart shows a comparison of sales between Tesco and Morrison. Morrisons acquired Safeway PLC this is why their sales increase dramatically still over 2 million more customers are shopping at Tesco today compared to 2005.

Extracted from Morrison and Tesco Annual Reports WEBSITE: MORRISON UK CITED 22/12/2007

SHARE PRICES The share market performance of Tesco plc shows a very optimistic indication of the performance of the company overtime. The shares has constantly gone up and remained above its competitors. This does not mean end of work but there is more room for improvement. This room for improvement can be identified by various ways such as by calculated from the Ratio Analysis.

Source: http://uk.finance.yahoo.com/q/bc?s=SBRY.L 31/12/06

LIQUIDITY Current Ratio Current Ratio of Tesco shows a slight improvement from last year 0.57 times (2004) to 0.59 times (2005), this by 2006 increased to 1.08 times. An often quoted current ratio is about 2:1, Tesco deals mainly in retail business in which even ratios lesser than this does work because it deals mainly is sales for cash and does not have a large figure for debtors. Accounting and Business Research But from the values it can be said clearly that the company cannot meets its current liability as they are due. Cash Flow per Share This ratio is calculated as follows: Cash flow = Net cash from operating activities +/- return on investment and servicing of finance taxation- dividend paid. Tescos cash flow per share went down from 31.64p (2004) to 25.26p (2005) showing a decline of 6.38p. This ratio indicates the ability of the company to fund long term investment from internally generated resources INVESTMENT Basic Earnings per Share (EPS) EPS is an important ratio, a requirement of the London Stock Exchange. EPS measures the overall profit generated for each share in existence over a particular period. Tescos EPS improved from 15.05p (2004) to 17.72p (2005), by the end of 2006 financial year EPS for Tesco plc reads as 17.52p.

Diluted Earnings per Share (EPS) Tescos DEPS improved to 17.5p (2005) from 14.93p (2004) it currently has decreased to 17.3p though it s bound to bounce back as the organisation has some great plans such as its move to the US. Dividend per Share This ratio relates the dividend paid during a period to the number of shares in issue during that period. Tescos DPS has risen to 7.56p (2005) from 6.84p (2004). The value has remained constant by the end of 2006.

Earning & Dividend per Share

25 20 EPS DPS EPS Forecast

Pence

15 10 5 0 2003 2004 2005 Year Ended 2006 2007

Dividend Cover Tescos Dividend Cover slightly went up to 2.35 times (2006) from 2.20 times (2005). The increase indicate that company paid or proposed more than 50% of its distributable profits to shareholders while retained the rest to finance its future operations. Industry acceptable value is around 2 which mean that Tescos earnings at least cover twice the dividends. The Board has proposed a final dividend of 6.83p per share (last year 6.10p). This represents an increase of 12.0%. As announced with our Preliminary Results last year, we have now built dividend cover to comfortable levels and this increase in dividend is again in line with

growth in underlying diluted earnings per share, which includes net property profits. We intend to continue to grow future dividends broadly in line with underlying diluted earnings per share growth. The annual report-2006 Price Earnings Ratio (PE) Tescos current PE ratio is 17.21, by 2006. It's difficult to say whether a particular P/E is high or low, but there are a number of factors which can be measured. To evaluate the company's share price it is important that a company's P/E ratio should be comparable to that company's growth rate. At any time, the P/E ratio is an indication of how highly the market "rates" or "values" a business. A P/E ratio is best viewed in the context of a sector or market average to get a feel for relative value and stock market pricing. Website: www.tutor2u.com, Cited: 28/12/07 Dividend Yield The Dividend yield for Tesco plc by the end of 2006 was 2.86%. It is the cash returned if the company pays the same dividend as last year. The rate at which the share price has gone down was more than the rate at which the DPS has gone up hence the end result was increase in the dividend yield from last year. Given to the situation of recession in last year the rate at which the share price is not the direct indication of the sentiments of the investors.

DEBT Interest Cover Tesco has an interest cover of 12.54 times (2006) which is higher than 8.17 times (2003). Tesco is earning enough profits before interest and tax to pay its interests comfortably. The consistency of interest cover (average value is 8.7 times) of Tesco within the past four years tells that company is maintaining the same proportion of debts to cover their interest so that they have sufficient amount of available profits.

Gearing Gearing is concerned with a companys long term capital structure. Tesco has fallen to 43% (2005) from 51% in (2004), which is maintained in 2006. Tescos improvement in this ratio is partly by an overall reduction of debt and the retained profit for the period increased cash. The gearing show the companys ability to service its long term debt. This can give helpful information regarding the source of investments into the company. The lower the gearing means that the company is relying on share holders fund and not depending much on the debts thus is desired because then the company will pay good dividend to their share holders rather than paying interest to the creditors. POLICIES Accounting Standards IFRS IFRS are used in many parts of the world, including the European Union, Hong Kong, Australia, India, GCC countries Russia, South Africa and Singapore Nearly 100 countries currently require or permit the use of, or have a policy of convergence with, IFRSs. Ryan, B (2004)

Tesco PLC has been preparing its financial statements under UK generally Accepted Accounting principles GAAP. Following a directive issued by European parliament in July 2002 the Group is required to prepare its 2005/2006 consolidated financial statements in accordance with International Financial Reporting Standards IFRS.

Corporate Governance Directors report on corporate governance demonstrates that they are committed to the highest standard of corporate governance and recognise that this high standard helps the business to deliver its strategy and maintains shareholders long term interests. The Directors believe that revised Combined Code provides a useful guide to review corporate governance. The market doubts about directors remuneration, audit and directors nomination are satisfied through transparent corporate governance. These committees operate on behalf of the board and keeps the chairman of the board informed at all time. Risk Management Tesco is becoming more and more multinational in its operations and financial market place is becoming larger and more sophisticated in its operations Tesco finances its operations by combination of retained profits, long and medium term debt, bank borrowings & leases. In order to ensure continuity of funds to meet its business needs Tesco adopts a policy to smooth debt profile, maintain sufficient undrawn bank facilities, such as overdraft. Tesco plc also try and uphold a strong credit rating so that debt may be refinanced when it falls due thus arranging the funding ahead of requirement. To limit its exposure to increase in interest rates Tesco has entered in to forward rate agreements, interest rate swaps, caps & collars to achieve desired mix of fixed & floating rate debt. Tesco hedges its investments in international subsidiaries & transactional currency exposures that have a significant impact on profit or loss account by using forward purchase or sale of foreign currencies & currency options. The risk of default by the counterparties to the financial transactions is managed by dealing with only those who have high credit quality.

Report on the Financial Aspects of Corporate Governance, (2002)

Investment advice Sales have risen by 14.06 % to 43137 million, and profits are up by 14.39 % to 2280 million with earnings per share increasing by 11.6 % in 2006 from 2005 which is one of the finest growths compared to the past years. The board has given dividend of 6.56 p per share in the year 2006. This result reflects the outstanding performance from all aspect of the Tesco strategy. The P/E ratio of Tesco is 17.64 which are good compared to market overall results; it shows positive sentiments within the market. Though the competition is getting even tougher, but with the new management strategies adopted by Tesco and their past experience have given them a good image and trust in the market and hence it will be a good value for investing money for those who are interested in earning money through share price fluctuations. Audit Internal and External Audit The internal audit department is fully independent of business operations and has a Group-wide mandate. External Audit PricewaterhouseCoopers LLP, the company's external auditors, contribute to independent perspective on certain aspects of the internal financial control system arising from their work, and report accordingly.

The engagement and independence of external auditors is considered annually by the Audit Committee before they recommend their selection to the Board. The Committee has satisfied itself that PricewaterhouseCoopers LLP are independent and there are adequate controls in place to safeguard their objectivity. Such measures include the requirement to rotate audit partners every five years. We have a non-audit services policy which sets out criteria for employing external auditors and identifies areas where it is inappropriate for PricewaterhouseCoopers LLP to work. Non-audit services work carried out by PricewatrehouseCoopers LLP is predominantly transaction work and corporate tax services.

PricewaterhouseCoopers LLP also follow their own ethical guidelines and continually review their audit team to ensure their independence is not compromised.

In Spring 2006 an internal audit of corporate responsibility was carried out. The last review by internal audit was carried out in 2004/05. The principal objective of the audit was to review the extent to which corporate responsibility is embedded in the way in which we operate and the progress made since our last audit. The audit team gathered information and, where available, collected supporting documentation, on the effectiveness of the following: Communication of our corporate responsibility strategy Governance of corporate responsibility processes Communication with key stakeholders (internal and external) Reporting process for the corporate responsibility review and other communications Monitoring our progress against established KPIs Benchmarking against other companies in the retail sector Our relationships with non-government organisations (NGOs) and socially responsible investors (SRIs) Management of external perceptions The audit team found that corporate responsibility is becoming increasingly embedded in the way we operate and has gained a higher level of recognition, both internally and externally. The inclusion of the Community Plan in our Steering Wheel supports our commitment to promote awareness across the business. They reported that developing our relationships with NGOs and SRIs continues to be a key focus for the corporate responsibility team and that we have received recognition of our progress by the positive results in a recent external benchmarking survey.

The audit noted that significant progress has been made following the last internal audit. One example is the development of international KPIs, demonstrating our commitment to extend our strategy overseas. Results will be reported in the Corporate Responsibility Review, 2007. The audit also found that strong relationships across the business have resulted in numberous initiatives being implemented and KPI targets being achieved, that the Corporate Responsibility Committee had been strengthened and that KPIs are in place for all key areas highlighted in the corporate responsibility risk assessment. However, the audit team highlighted the need to make more progress on implementing a long-term group vision and setting long-term KPI targets. We aim to make significant progress in developing and articulating our vision and establishing further long-term KPIs this year. SWOT ANALYSIS Strengths Tesco is the largest grocery retailer in the UK. This puts it in a strong position to negotiate competitive buying terms, gives access to capital resources and provides competitive advantage. Tesco has succeeded in promoting a customer-focused corporate culture across the whole of its business and also to leading suppliers. The Tesco brand is well trusted and respected by UK consumers. Tesco is committed to Tesco Clubcard and continues to use this as a tool to strengthen customer loyalty and to develop actionable consumer insights. Tescos on-line service provides the largest Internet supermarket in the world contributing 2 % of Tescos total revenue with annualised sales of over 719 million. The mechanics of marketing, order capture, fulfilment and delivery are now in place, meaning that the company is well-positioned for further growth. The senior management team is renowned as being one of the best in the industry and has consistently driven innovation whilst delivering to planned growth. Employees are well briefed, focused and encouraged to make their fullest possible contribution to Tescos success. Weakness

Tescos programme of price reductions has so far been driven largely through cost savings, allowing prices to fall whilst operating margins are maintained. There must, however, be some limit to the savings that can be achieved without affecting everyday operations and when this point is reached further price reductions will lead to pressure on margins.

Tescos international expansion strategy requires heavy investment, particularly in the Asian market, and as yet, there are small returns. Expansion into new countries also carries an element of risk. Initially, the UK operation will have to support these ventures in terms of set up costs and supporting their initial losses.

Tesco has been exposed to economic difficulties in some markets. For example, results for 2003-04 and 2004-05 show that like-for-like sales in many markets are depressed and economic change has been blamed for this, although new store openings have helped to compensate for slowdowns in the performance of existing stores.

Tesco has a large store portfolio in the UK, much of which is old and will require continuing capital investment on a large scale in order to maintain standards.

Opportunities

The international business is becoming increasingly important as a driver of group sales. Tesco is investigating new markets overseas, with East Asia being seen as particularly promising. Tesco has recently moved into Malaysia, Japan, Turkey and China.

Tesco has a very ambitious growth target for non-food and has stated "we intend to be as strong in non-food as we are in food." Tesco has increased its market share to over 8% since 1999. Development of non-food-only stores is underway, with the first examples due to open in the UK in autumn 2005.

Tesco has the opportunity to use Clubcard as a defensive promotional tool. Rates of reward can be increased and points can be allocated on a wider range of purchases, allowing Tesco to improve its competitive positioning. Tescos continued

segmentation of customers by life stage will allow it to target products and services more effectively. The effective utilisation of the Clubcard database will help to increase the average basket size and dissuade customers from shopping elsewhere.

Tesco is one of the founding members of the World Wide Retail Exchange, a webbased market place set up to improve the efficiency of B2B commerce. Tesco will be able to shape the design and scope of the Exchange and will remain at the forefront of supply chain efficiencies

Threats In the home market, Sainsburys, which has seen periods of weak trading now appears to be making progress, meaning that Tesco may find it far harder to generate customer switching. Asda also remains a tough opponent, especially in the North of England and, in the same areas, Morrisons may stage a recovery once it completes its current portfolio reorganisation. Restrictive planning guidelines in the UK continues to inhibit organic store development and may inhibit the development of the Tesco Extra format. Tesco is relying on a programme of store extensions in order to roll-out the Extra format more cheaply and quickly than relying on new builds. On the positive side, however, the publication of PPS6 in 2005 has not significantly altered the planning regime. Since Tesco is the biggest supermarket operator by a considerable margin Political opposition to the power of supermarkets has tended to focus on it. High-profile

groups such as Friends of the Earth have been highly critical of the company and warned that Tesco's growing market share is bad for British business, bad for consumers, bad for the environment and called on the UK Competition Commission to urgently investigate Tesco's monopoly position. Friends of the Earth believe Tesco must be forced to sell off stores as soon as possible and called for a moratorium on mergers in the retail sector. So far there is little sign that this is affecting consumer behaviour or Government policy.