Want to invest in Asia but don't know your KOSPI from your kumquats?
The days when Tesco (LSE: TSCO) could report soaring profits during a recession are long gone -- it's simply too big.
According to today's interims, Tesco's group profit before tax in the first half of the 2009/10 year was £1.4 billion -- a rise of merely 1.5%.
Group sales did better, with £30.4 billion representing an uplift of 8.3%. If you account for the impact of the VAT cut, which will shortly be reversed, the results were better still at 9.3%.
And on underlying basis diluted earnings per share rose 9.1% to 14.48p -- slightly ahead of expectations.
More good news was the 9% hike in the interim dividend to 3.89p, and debt on track to fall to £8.5 billion by year-end, with Tesco announcing it has completed another property sale-and-leaseback deal valued at over £500 million.
"Progress across the Group, combined with our strong financial position funding continued investment in new space and new businesses, means we're well-placed for the global recovery," said CEO Sir Terry Leahy -- and I agree.
The UK is stuffed -- sort of
That a supermarket that takes roughly £1 out of every £3 we spend in the UK on groceries can still report positive sales and profit growth during the worst recession for generations is to my mind hugely impressive.
But investors who sent Tesco shares lower in early trading even as the FTSE 100 romped ahead clearly weren't convinced that every little helps.
They might be spooked by Tesco's US operations, which continue to be the stuff of nightmares. Although sales rose over 100% to £168 million, this growth simply fed what's currently a money-losing machine that devoured £85 million in the period.
Still, while the US losses are steadily adding up, they're small beans in Tesco's overall mix.
Far more valid a concern is the UK picture. Domestic sales still comprise two-thirds of group sales, and UK like-for-like sales (excluding petrol) rose just 2.7% over the period. That's a slowdown since Tesco's June trading update, when UK sales were growing 4.3% in the quarter. And few would doubt it took a hit to margins and a big push via Tesco's Clubcard to achieve even this anaemic growth.
Also worrying traders is an analyst's report warning food inflation is set to fall, taking supermarket sales with it. But given the truly woeful record of food inflation forecasts in recent years, I don't think that's so consequential.
Overseas action
Personally, I'm happy with any UK profit growth from Tesco right now.
Tesco's domestic scale means its fortunes remain unavoidably wedded to the UK economy and its consumers, and in this deep recession it's no surprise downmarket rivals are nibbling at the edges by selling cheaper beer and bread.
In the meantime, Tesco is still adding floor space -- 8 million square feet this year, with 75% of it located abroad -- that will serve it well when the economy recovers and we all head out to buy the bigger ticket items we've been postponing, while treating ourselves to something from Tesco's Finest range.
More importantly, there's the International business. The European results were even more lacklustre than in the UK thanks to Eastern Europe's woes, but Asian sales boomed 38.5% to £4.4 billion, partly on the back of Tesco's Korean purchase last year.
Also doing well is the personal finance business. Tesco has bought out erstwhile partner Royal Bank of Scotland (LSE: RBS), and it's been rewarded with a £115 million contribution to profits, with 27% margins that dwarf the profits from groceries.
I was also happy to hear Tesco tell the BBC it has no plans to buy Northern Rock off the Government, given how the Rock has been getting rid of its good customers while keeping the rubbish ones!
Good value for future growth
Tesco remains on course to earn around 29p a share this year, putting its shares on a forecast P/E ratio of about 13.5 at today's 388p.
The forecast dividend yield is a secure (and steadily rising) 3.2%, while with earnings growth likely to amount to about 10%, Tesco is on a PEG ratio of 1.25.
Tesco by no means looks cheap on these figures, but again we must remember Sir Terry's train is chugging through a recession.
Every supermarket chain's sales, profits and share price have been buoyed up through the bear market by the fact we all need bread and milk. But the world economy is turning, and unlike its cut-price peers, Tesco looks well-positioned to outperform when we return to growth, too.
In particular, there's its enviable position in the markets of South East Asia.
Presently international sales contribute a little less than a third to the total, but they're growing strongly, and even factoring in a UK recovery I can see them reaching parity with domestic takings in a few years.
That makes Tesco a great way to tap into emerging markets -- but unlike most direct investments in those countries you get a fair-sized and growing dividend and a UK boardroom for your money, too.
Supermarkets can't do BOGOF deals on their shares (well they can with rights issues, but investors tend to throw a wobbly), but Tesco offers the next best thing -- huge international growth potential at a decent price, albeit disguised by the global slowdown and domestic saturation.
Perhaps like Warren Buffet -- who has also invested in Tesco -- I'm being too simplistic. Let's hope the market agrees and sends the shares lower, because I'd back up the truck on significant weakness on 'disappointing' results like these.
More from Owain Bennallack:
Note: Owain owns shares in Tesco.
