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

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »