Tesco (LSE: TSCO) just can’t catch a break. It seems as if there’s a nice piece of bad news awaiting the company almost every day.
Sliding sales, declining profits, accounting scandals and debt mountains are just four of the many headwinds that are currently buffeting the company. However, things could be about to get a lot worse for the UK’s largest retailer.
Property problems
Tesco’s land bank has been in the news several times this year. Indeed, the company attracted plenty of negative attention back during June, when it was revealed that the group was hoarding enough land to build 15,000 new homes, 4.6m sq m, or 310 separate empty sites.
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Tesco’s did try and play down these concerns by announcing that it will build 4,000 homes on vacant land it no longer needs.
Nevertheless, the company’s land bank is back in the news again this week, once again for all the wrong reasons. This time the City is concerned about the value of Tesco’s land.
For example, within Tesco’s most recent set of results, the value of the company’s property, plant & equipment net was booked at just under £25bn. However, the company admitted last year that some of this land was not worth as much as it originally anticipated, as the group was no longer planning to use the land to build stores on. This revelation lead to a £800m writedown.
Now, after Tesco’s has slashed its capital spending budget and plans to reconsider expansion plans, further writedowns could be around the corner. What’s more, this week the company announced that around one third of its hypermarkets were in need of help, not generating sufficient returns.
If this is really the case, Tesco could be forced to write down the value of some of its larger stores. Unfortunately, if Tesco were to start writing down the value of some of its stores, this would have a knock-on effect across the whole group. And, along with the revaluation of stores already built, the company would have to once again revalue the land that’s been earmarked for store construction.
Crunching numbers
It’s hard to tell how much a revaluation of land will cost Tesco. However, it seems as if the market is already pricing in a £11bn revaluation. Tesco’s market capitalisation, of just under £14bn, is significantly below the value of the company’s property, as booked on its balance sheet.
These figures are only estimates, although some analysts are forecasting a writedown of £5bn to £10bn, which would hit the company’s balance sheet hard, erasing the majority of shareholder equity.
Still, whatever the cost of these writedowns, it appears as if Tesco’s is set for further pain and the company could be facing heavy losses in the near future.
