Friday 18 October 2019

Share Watch: For overcoming years of woe, every little helps for Tesco


Stock photo: Reuters
Stock photo: Reuters

John Lynch

Is it my imagination or has cooking taken over the television screens? You cannot watch a travel documentary these days without seeing some master chef finely slicing an onion on the top of an extinct volcano; or so-called celebrities filling the screen each evening with misshapen jam tarts and soggy-bottom pastry.

Jolly cooks from Bali to Ballymaloe seem determined each night to show me how to boil an egg; it's a TV food obsession. However, it does explain what is happening in the British retail trade.

While the UK High street is, as they say, "in the basement", that very serious malaise does not seem to apply to the grocery sector. It has been forced to adapt to the new trading reality of the internet era. It is one of the mainstays of this sector we are looking at today, the giant supermarket chain Tesco.

Tesco is still one of the "big four" supermarket groups (alongside Sainsbury's, Asda and Morrison), controlling 70pc of the UK market despite the march of the German discounters Aldi and Lidl.

It has more than 6,000 stores - half in the UK - employs 475,000 people and has a market value of £23bn (€25bn). Over recent years the group has been through the wars of being forced to retreat from many world markets including Japan and the USA.

Its present health is linked to the success of its UK and Irish operations. But its business is now shifting to a whole new level. The group has acquired the UK's largest food wholesaler, Booker, at the same time that Morrison linked up with Amazon and the Sainsbury's deal (still under examination) to buy Asda.

Tesco's deal with Booker is part of a confidence-recovery programme. A few years ago it was forced to admit to a catastrophic overstating of profits, which resulted in £2.2bn being written off its market value.

The new CEO, Dave Lewis, set to do some axe-wielding. He restructured the management, closed its HQ, cancelled 50 new large supermarkets and announced a raft of cost-saving measures.

In recent times the group has been active. In addition to its £4bn purchase of Booker last year, it has concluded a deal with the French grocery giant Carrefour and is setting up a new discount chain.

The Booker deal provides Tesco with greater pricing power, better control over its supply chain and is expected to boost margins.

The deal with Carrefour is to use their respective strength to buy own brand products as part of a long-term tie up. In its effort to combat Aldi and Lidl, it has set up a new chain of discount stores (Jack's) using existing shops or some of its mothballed sites.

However, analysts are of the opinion that such a small number of outlets (15) will not make a great difference.

In the last four years the group has been repositioning itself, but like all "supertankers" it doesn't turn quickly.

Since the group issued its profit warning in 2012 (its first in 20 years), investors have been suffering.

The accounting scandal in 2014 caused serious damage to not only its reputation, but to the value of the group and to investors. As a result the share price has been in the doldrums but is slowly recovering, trading today at 214p.

Sales at £57bn still trail those of four years ago, as do its profits. Margins are very tight (2pc), but investors are hoping the Booker and Carrefour deals will help.

A sign of its improving position is cash flow is increasing and debt is down by a third after offloading a number of properties.

This is good news for shareholders who welcome the return of the annual dividend after its absence for number of years.

Evidence to date shows Tesco's recovery has been slow and steady - but it is in an improving space. Its troubles appear to be in the past and this month's statement should indicate progress.

The stock is a recovery one and today's share price could be seen as a sensible entry point.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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