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Every little hope for Tesco recovery

Tesco's comeback story has gripped the London market, but investors will need patience in spades
October 7, 2015

If Tesco (TSCO) wants investors to measure its journey back from the brink by growth in operating profits, then so be it. Britain's largest supermarket chain reported a 64 per cent improvement in half-year operating profits to £354m. But that's only because it made a kitchen-sinking £563m worth of impairment charges, restructuring costs and one-off provisions in the comparable period of 2014; strip these out and operating profits fell 55 per cent year on year. That shows just how much work remains to be done if new chief executive Dave Lewis is to turn the retailer around following a disastrous 2014.

IC TIP: Hold at 190p

Break the numbers down and there are some positives. An improving trajectory in like-for-like sales growth in the UK and Republic of Ireland echoed recent trends at close rival Sainsbury (SBRY). Underlying sales declined 1.3 per cent in the first half, compared with a 2 per cent decline in the fourth quarter of the previous financial year. First-quarter like-for-like sales dipped 1.5 per cent, but the decline slowed to 1 per cent in the second quarter. International like-for-like sales rose 1 per cent in the first half - the first increase for nearly three years - as customers across the company's eastern European markets responded to improved fresh food products. That said, overseas investments and new legislation in Hungary still pulled international profits down 26 per cent to £102m.

Last month Tesco offloaded its South Korean Homeplus business - which analysts at Shore Capital call a "jewel in the group's portfolio" - through a £4.24bn private equity deal. However, it looks like management plans to hang onto loyalty card data business Dunnhumby. Mr Lewis had earmarked the business for a possible disposal, but rumours suggest a lack of interested bidders hindered a successful sale. There doesn’t seem to be any intention to offload any other international assets either, such as the group’s retail operations in Thailand or eastern Europe.

Shore Capital has placed its forecasts under review, but previously expected pre-tax profits of £323m for the current financial year, giving EPS of 2.9p, down from £861m and 8.1p for the year ended 28 February 2015.

TESCO (TSCO)
ORD PRICE:190pMARKET VALUE:£15.5bn
TOUCH:190.1-190.2p12-MONTH HIGH:253pLOW: 155p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE:76p*NET DEBT:139%

Half-year to 29 AugustTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201427.9-19.0-0.31.2
201527.274.00.3nil
% change-2---

Ex-div: na

Payment: na

*Includes intangible assets of £3.1bn or 38p a share