Tesco Unlocks Its Property Value

Tesco (LSE: TSCO) already sells you milk, washes your car, and insures your dog. Now it's using its property portfolio to fund future expansion.

Property management is an important element of Tesco's success -- selecting the right locations and developing them in accordance with local needs is essential. Tesco recognises this, and currently holds 85% of its property as freehold. Fixed assets -- mostly property -- are valued on its books at £16bn, but the company estimates that the market value of these properties is closer to £24bn.

With plans for international expansion, it makes sense for Tesco to release some of this property value as cash, while still maintaining control of its strategic assets. This morning's announcement of full-year results shows how Tesco intends to do that; joint venture companies will be set up with property funds such as Morley, for the purpose of buying parts of Tesco's portfolio. Over the next five years, this is planned to free up £5bn in cash -- some of which will also be used for share buybacks, and some to fund future growth.

Tesco's most recent announcement was a foray into the American market. Initially at least, this will consist of convenience stores in California, so there will be little direct competition with American giant Wal-Mart (NYSE: WMT). As Tesco's foreign successes have generally been in less developed markets, many would question the logic of entering a sophisticated market like the US -- Sainsbury (LSE: SBRY), for example, tried and failed.

However, this mornings numbers were slightly ahead of market expectations. Pre-tax profits came in at £2.21bn, versus forecasts of £2.18bn, up 16.7% on the previous year. Like-for-like sales in UK increased by 7.5% in the period, although for the final quarter of the year this had fallen to 6.2%. Stripping out the effects of fuel price increases, fourth quarter like-for-like sales were up 4.9%.

Tesco shares were down 0.5% this morning at 325p.

While there's a place in many investment portfolios for large and profitable businesses like Tesco, it is also fair to say that companies of this size -- market capitalisation of £25.5bn -- are unlikely to rocket in value overnight. As famous investor Jim Slater once said: "Elephants don't gallop".

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