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Chief executive Terry Leahy says Tesco is at its best in tough markets and this claim is not without merit. Its UK business alone, which was feared to have suffered from customers trading down, enjoyed 3.7 per cent sales growth in the first half (excluding fuel).
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Tesco also managed to maintain a stable group trading margin of 5.8 per cent, no mean feat in the current climate. Its international business contributed trading profits of £346m (2007: £271m), or more than 20 per cent of the total, before £60m of planned trading losses from the start-up of its US business. But the US business is expected to break even next year and that is partly why some analysts are expecting the international arm to make up to 50 per cent of Tesco's profits during the next five years.
Another positive is that Tesco raised its dividend by 12 per cent and intends to keep net borrowing at £8bn by year-end even though it remains acquisitive (completing a £1bn Korean acquisition and the £950m buy-out of Royal Bank of Scotland's stake in Tesco Personal Finance in the second half).
Panmure Gordon forecasts adjusted full-year EPS of 26.3p (2008: 24.8p), rising to 30.5p the next year.
| Tesco (TSCO) | ||||
|---|---|---|---|---|
| ORD PRICE: | 385p | MARKET VALUE: | £ 30.3bn | |
| TOUCH: | 384-385p | 12-MONTH HIGH: | 492p | LOW: 341.5p |
| DIVIDEND YIELD: | 2.9% | PE RATIO: | 14 | |
| NET ASSET VALUE: | 154p | NET DEBT: | 61% | |
| Half-year to 23 Aug | Turnover (£bn) | Pre-tax profit (£bn) | Earnings per share (p) | Net div per share (p) |
|---|---|---|---|---|
| 2007 | 22.6 | 1.29 | 11.8 | 3.20 |
| 2008 | 25.6 | 1.44 | 13.2 | 3.57 |
| % change | +13 | +11 | +12 | +12 |
Ex-div:08 Oct Payment:19 Dec |
||||
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Tesco is weathering the tough retail environment in the UK and meeting the needs of changing consumer requirements better than we thought. International sales will provide an important boost to earnings going forward. Trading around our sell tip price (386p, 19 June 2008), the shares are fairly priced.
Last IC View: Sell, 367p, 21 August 2008
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