Tesco PLC Asia Results Confirm My Buy Rating

Tesco PLC (LON:TSCO) may have failed in the US, but its Asian operations deserve much more respect.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Tesco (LSE: TSCO) shares have plunged to a 10-year low of 278p over the last fortnight, as investors threw their toys out of the pram ahead of the UK’s largest supermarket’s annual results announcement.

TescoMarkets hate uncertainty, so I wasn’t surprised to see Tesco’s share price give a modest bounce after its results were published — after all, the company did make pre-tax profits of £2.3bn last year, giving its shares a P/E ratio of just 9.1 times adjusted earnings, and a yield of 5%.

What’s more, Tesco maintained its dividend, as I predicted, meaning that its dividend has not been cut for 30 years, a record few of its FTSE 100 peers can match.

The star in Tesco’s portfolio?

However, although I believe Tesco will turn around its UK operations, what really caught my eye were the results from Tesco’s Asian businesses, which operate in Korea, Thailand and Malaysia.

Total sales rose by 2.6% to £10.3bn, and although profits dropped to £692m, Tesco reported a trading margin of 6.7% for Asia — considerably higher than the 5.0% achieved by its UK operations.

Tesco’s Asian profits accounted for more than 20% of the firm’s trading profits, and that 6.7% margin looks extremely attractive to me, given the flagging profits being reported by all the major UK supermarkets. I believe that Asian growth could help Tesco outperform the UK supermarket sector over the next couple of years.

Indeed, Asia could become doubly important for Tesco if its joint venture with China Resources Enterprise (CRE) in China is successful. The deal gives Tesco a 20% stake in China’s largest food retailing business, and I believe it could become a very valuable long-term asset.

Tesco’s international operations have come in for a lot of criticism, and while its US business was a major failure, I don’t think its Asian efforts should be tarred with the same brush.

Now is the time to buy

Tesco shares really are unbelievably cheap. As I’ve already mentioned, the firm’s shares trading on a trailing P/E of 9.2 and offer a dividend yield of 5.0%.

This undemanding valuation is backed by a property portfolio worth £24bn, providing further downside protection.

Tesco isn’t without its problems, but I believe the firm is a great long-term income buy that should deliver the goods for decades to come. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland owns shares in Tesco but not in any of the other companies mentioned in this article. The Motley Fool owns shares in Tesco.

More on Investing Articles

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

The Darktrace share price jumped 20% today. Here’s why!

After the Darktrace share price leapt by a fifth in early trading, our writer explains why -- and what it…

Read more »

Dividend Shares

850 shares in this dividend giant could make me £1.1k in passive income

Jon Smith flags up one dividend stock for passive income that has outperformed its sector over the course of the…

Read more »

Investing Articles

Unilever shares are flying! Time to buy at a 21% ‘discount’?

Unilever shares have been racing higher this week after a one-two punch of news from the company. Here’s whether I…

Read more »

artificial intelligence investing algorithms
Market Movers

The Microsoft share price surges after results. Is this the best AI stock to buy?

Jon Smith flags up the jump in the Microsoft share price after the latest results showed strong demand for AI…

Read more »

Google office headquarters
Investing Articles

A dividend announcement sends the Alphabet share price soaring. Here’s what investors need to know

As the Alphabet share price surges on the announcement of a dividend, Stephen Wright outlines what investors should really be…

Read more »

Investing Articles

Turning a £20k ISA into an annual second income of £30k? It’s possible!

This Fool UK writer is exploring how to harness the power of dividend shares and compound returns to build a…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

Can I turn £10k into a £1k passive income stream with UK shares?

Everyone talks about the magical 10% mark when it comes to passive income investing, but how realistic is it to…

Read more »

Investing Articles

3 market-beating international investment funds for a Stocks and Shares ISA

It always pays to look for new ways to add extra diversity to a Stocks and Shares ISA. I think…

Read more »