Investment Column: Tesco still a staple for investors' baskets
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Your support makes all the difference.Our view: Buy
Share price: 406.7p (+11.4p)
The balmy UK weather over the bank holiday will have done wonders for sales of Tesco's beer, burgers and other barbecue fare but, for potential investors, the retail giant's full-year results last week left them with much to chew on. Philip Clarke, the new chief executive of Tesco, was candid in his appraisal that the market leader's UK business "can do better", particularly in terms of its execution, marketing and assortment on key non-food categories. Elsewhere, he acknowledged that Tesco had to find a winning formula in Japan before it invests more capital and that growth had been slower than expected in China.
Mr Clarke also refused to be drawn on whether it may eventually exit the US, where it hopes its Fresh & Easy chain will become profitable before the end of the 2012-13 financial year.
Despite these weaknesses, Tesco still boasted an impressive 11.3 per cent rise in pre-tax profits to £3.5bn over the year to 26 February, for which most retailers would have given their right arm. Notable key drivers of this growth were very strong performances in Thailand, South Korea and Malaysia and in central Europe, particularly in the Czech Republic and Slovakia. Among other divisions, Tesco's retailing services business alone, which includes telecoms, dotcom and Tesco Bank, also grew trading profit to £583m.
In moves to further galvanise this division, Tesco Bank is set to launch mortgages later this year and the grocer vowed to be a multi-channel retailer wherever it operates. For instance, it unveiled advanced plans to introduce a "sizeable online non-food" operation in South Korea over the coming months.
That said, we expect the grocer's performance in the UK – which still accounts for nearly 70 per cent of trading profit – and long-term speculation about its commitment to the US to weigh on its shares in the near term.
However, in the long term we see a plethora of reasons why potential investors may want to pop Tesco in their shopping basket. For starters, the broad spread of Tesco's operations globally, from China to Turkey, and from selling second-hand cars online to pawn-broking, means that the grocer can afford to suffer the odd bump in the road without the juggernaut being derailed.
Its shares also have the foundation of an enormous property empire globally – with a commitment to maintain at least 70 per cent freehold, alongside lucrative sale and leasebacks. For those looking for reassurance, Tesco has the resilience of selling food and boasting a progressive dividend strategy that few, if any, UK-listed companies can hold a candle to over more than 25 years. Even better, Tesco's shares trade on a modest forward earnings multiple of 11.5 after falling substantially over the last year. In addition to these reasons, we think that Mr Clarke has learned a thing or two in his 35 years of experience at Tesco and will keep the grocer moving forward in the right direction. Buy.
Speedy Hire
Our view: Buy
Share price: 28.75p (+1.75p)
Speedy Hire yesterday announced it has struck a deal to dispose of its accommodation hire unit, selling it to the market leader in this part of the industry – Elliott Group, the UK subsidiary of Algeco Scotsman – for just under £35m.
It has been no secret that the business has dragged on the tool hire group for quite a while now. In the last financial year it posted an operating loss of £4.5m, increasing from £2.1m in the 12 months before, so it is hardly a surprise that speculation about such a move has been rife.
Looking at the sums involved, those of a bearish disposition may point out the price being paid represents a significant discount to its net asset value of £52.4m.
Nonetheless, the proceeds from the sale will be used by Speedy Hire to reduce its debt and invest in other (hopefully) more promising areas of the company. It also removes a significant headache for management, leaving them able to concentrate on a slimmed-down group.
When we last turned our attention to Speedy Hire six months ago, we said it was undervalued despite being in a good position to benefit from a recovery in its markets. The shares have seen only a slight uptick since then, and there is a way to go yet. This disposal may not be the catalyst for major sustained gains in the short-term, but it is a positive step for the group's long-term prospects.
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