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Here’s why I rate the Tesco share price as top FTSE 100 value right now

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Tesco (LSE: TSCO) shares edged up a little Wednesday, as the supermarket giant confirmed its exit from Asia. All conditions have now been satisfied, and the disposal should complete around 18 December. The Tesco share price has outperformed the FTSE 100 this year, with its essential supplier status helping soften the Covid-19 impact. But with the index pushing up strongly in December, the two are converging.

Over five years, the picture is rather different, with the Tesco share price up around 55%. In that time, the Footsie has gained a mere 11%, so it does look like Tesco’s recovery is here to stay. Part of the company’s restructuring involves its withdrawal from Asia. And the sale of its businesses in Thailand and Malaysia means that episode is drawing to a close. Tesco has already sold off its Chinese business.

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There’s some irony in the way Tesco’s international expansion has reversed. Back when it was extending its reach eastwards, many investors saw it as a positive move. Big profit can certainly be had from Asia, and some companies are doing extremely well from their worldwide spread. Unilever is a good example, with its products on shelves almost everywhere in the world.

Refocus and cash back

But Tesco’s refocus on the UK, Ireland and Europe has turned an overstretched business into a lean and healthy one with a strong balance sheet. And that has clearly supported a rising Tesco share price. This final Asian sale, to Thailand’s C.P. Retail, will strengthen Tesco’s balance sheet further. And there will be additional boosts for shareholders and pensioners.

For the latter, Tesco has confirmed its earlier announcement that it will use £2.5bn of the sale proceeds to reduce its pension deficit. And it will return a further £5bn to shareholders via a special dividend.

What does all this mean for the Tesco share price? In itself, not a lot. That’s because the details of the sale have been known for some months, and we were really only waiting for the final confirmation. It was all about getting regulatory approval in Thailand, and nobody expected any difficulty on that front.

Tesco share price cheap

Looking to the wider picture, I remain convinced that Tesco shares are undervalued now. I’ve been sceptical throughout the sometimes painful recovery years, watching Lidl and Aldi expanding while Tesco shrank. But Tesco has shown its real strength during the pandemic lockdowns.

I think we’re moving unstoppably towards serious growth in the home deliveries market. And I can easily see 50% and more of all groceries shopping being done that way before too many years are past. Tesco’s early mover advantage is strong, and its leading market share gives it the benefit of economies of scale. That all leads to an infrastructure that’s way more advanced than many of Tesco’s competitors.

What of financial measures? The current 2020-21 year is hard to gauge. But forecasts put the Tesco share price on a 2021-22 P/E of 14. That’s close to the FTSE 100’s long-term average, for a company I rate as significantly better than average. Couple that with a dividend set to yield around 4%, and I rate Tesco a firm long-term buy.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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