Business World

Friday 24 November 2017

Tesco's ambitious, achievable strategy makes it well worth a punt

Thomas Molloy

Thomas Molloy

IT is hard to like Tesco. Those boring ads. That trite slogan. The cynical attempts to force parents to shop in return for small contributions to local schools. But there is no doubting that Tesco is a global retailing phenomenon and well worth a punt.

On Tuesday, Tesco posted a 9.3pc rise in full-year net profit and said it is well-placed for sustained profitable growth.

The behemoth's second-half performance beat UK rivals such as Asda, Sainsbury and William Morrison to put Tesco back in the lead in its home market, but it is the company's success outside this market that really separates Tesco from the others.

Analysts weren't particularly pleased with all this. The results were described as "solid if largely unexciting" or "broadly as expected", but the sheer scale of Tesco's operations and the company's successful forays into such varied markets as Ireland and South Korea mean it has a proven expansion model which suggests it is well-positioned to make headway in the US and China, two markets Tesco is trying to crack at present without success.

Losses from the group's Los Angeles-based convenience store chain, Fresh & Easy, widened to £165m (€123m) from £142m.

But America, with its massive markets, remains the Holy Grail for retailers everywhere, and there is every reason to believe that Tesco will eventually succeed there as well as China, where the company will open nine shopping malls and 23 hypermarkets this year.

Some analysts bemoan the fact that the company remains such a long way from leading market positions in the US and China, but surely this distance makes the stock interesting?

Tesco has a significant debt pile of £7.9bn, but the company has been quietly paying off its debts -- this week net debt fell £1.7bn on the back of better-than-expected cash generation, capital expenditure control and working capital improvements.

To be sure, Tesco's interests are so varied that the company could fail on one of many fronts, but equally those interests protect it from failure in any particular market.

It is hard to think of many food retailers where a dip in profits in Europe can be offset by stronger performances in Asia. It is also a company with excellent operating cash flow performance, with cash flow rising by around £1bn to £5.9bn, including £600m of negative working capital.

The shares are relatively cheap and continue to be undervalued relative to English peers at 13.3 times 2010 annualised forecast earnings versus 13.9 times at Sainsbury and 13.2 times at Morrison.

Napoleon famously dismissed the British as a nation of shopkeepers, but had he been an investor, he might have appreciated the importance of good retailers to both the economy and individuals' portfolios.

Here in Ireland, where we have no pure retailer on the Dublin exchange, Tesco offers one relatively straightforward method to invest in the sector.

Irish Independent

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