Tesco has been firmly off the ‘buy’ lists of many for a long time.
Once a darling of investors and reliable dividend player, the past few years have seen shareholders endure an accounting scandal, an unsuccessful international expansion attempt, a very public row with Marmite-maker Unilever and a Christmas fiasco which saw the supermarket send shoppers rotten turkeys.
It’s been a torrid few years for the retailer, which is also battling to stave off the increasingly popular discount rivals nipping at its heels. Tesco has managed to retain its dominant position, but its market share has slipped to around 28 per cent from 31 per cent a decade ago.
Tesco is back on analysts’ radars after its £3.7billion merger with cash and carry group Booker
As recently as December, some 43 per cent of analysts rated the stock a ‘sell’ and shares are 212¾p – still less than half of their November 2007 peak of 492p.
But the retail giant is back on analysts’ radars after its £3.7billion merger with cash and carry group Booker finally went through last week.
Barclays was one of the first to set out its stall. It has reinstated an overweight rating on the stock, judging it better value than others, with a target price of 225p.
Analysts at the bank explained that, with the merger now complete, ‘the market can focus on the merits of the two businesses and the opportunities for collaboration’.
Tesco finally reinstated a dividend at the end of last year, to the delight of many. It’s a sign that the firm feels confident enough about its cashflow to start giving some money back to shareholders.
The business, which has a market value of £20.8billion, gave a buoyant update at the start of the year. It saw some 58million customer transactions and 770,000 online grocery deliveries in the key Christmas week, with UK sales up 2.1 per cent in the 19 weeks to January 6. But sales were down by 11.1 per cent in Asia and up just 0.6 per cent in Central Europe.
Tesco clearly still faces a number of headwinds. Spending has slowed and consumers are feeling the squeeze – that much is clear from the string of high street casualties already this year – but groceries are one of life’s unavoidable expenses. And, while customers might not really care about a supermarket cooking the books in the long-term, they do still care about quality products and low prices.
It means the discount retailers are likely to continue chipping away at the giants’ market share. Tesco is responding by making an effort to overhaul its value ranges and improve its margins, and it is continuing to cut costs.
The Booker deal is set to improve the firm’s access to restaurant chains and corner shops. It’s a brave move for the company to start expanding into new areas again after years of selling businesses and streamlining its offering.
The two giants together are expected to record turnover of almost £60billion a year, with £200million a year in cost synergies expected to boost the bottom line. Such a gargantuan business will enjoy even greater buying power than Tesco alone boasted.
Midas verdict: Hold – analysts seem optimistic about the potential for this new behemoth and those who already hold shares are now being rewarded for their patience with a dividend. Anyone not already in may want to hold off until the dust settles on the Booker deal.