The divestment strategy of Tesco (LSE: TSCO) will likely help management deliver on its promises, but it’s not the only element to consider when it comes to deciding whether Tesco is a value play or not right now.
That said, I’d hold on to its shares at their current price of 185p if I were invested.
Tesco Is Cheap
True, the marketplace is challenging, and Tesco stock is still valued at 25 times its forward earnings. If you think that’s a lot, however, it’s also meaningful the discount (26%) at which its shares trade against their 52-week high of 252p in mid-April, particularly considering that ever since Tesco has issued about 30 ordinary updates, including its annual and quarterly results — neither of which included nasty surprises.
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The food retailer announced today to have agreed to divest its Korean operations, news which was widely expected to push up its stock over 2% in a rising market, at least according to a few analysts I talked to before the market opened.
Tesco’s Korean assets have been fully valued at over £4bn, but its shares haven’t budged.
Macro
A top-down approach signals that food retailers in the UK are unlikely to be impacted by slightly higher interest rates, while marginally lower rates won’t make much difference, either. Even much lower oil prices will unlikely determine a significant rise in their profits — indeed, they may render their policy at the pumps less effective. And if oil prices rise, Tesco should be able to pass on that cost to the consumer from these levels.
In this context, Britain’s largest grocer isn’t worse off than any of its major rivals, from Sainsbury’s to Asda and Morrisons. It’s not even fair to say that German discount grocers Lidl and Aldi will benefit more than their competitors, even though they are growing at a faster pace.
Then, let’s look at Tesco’s key fundamentals.
There’s Appetite For Tesco’s Assets
As Tesco says in its release today, the proposed sale of Korea’s Homeplus to investors led by MBK Partners for a cash consideration of £4bn before taxes and certain costs — disposals will likely yield net proceeds of about £3.4bn — will reduce its total indebtedness, which is arguably the biggest concern for investors.
Selling assets is never easy when buyers know that divestments are a top priority for the seller, so chief executive Dave Lewis has proved once again that he is doing a great job in managing expectations. This is truly encouraging because additional disposals should not be written off, and they could allow Tesco to keep a lid on its fast-rising pension deficit, too.
Here’s the real problem, though: unless Tesco shows that it can grow more profitably, the market will not fully back its management team, who is now faced with critical decisions after a decent stint until March.
