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.
Markets 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.
