Investors ignore growth abroad to focus on UK woes
MAYBE Tesco should move its primary listing to Hong Kong. Then investors might pay more attention to Asia, where sales grew by 11.4 per cent at constant exchange rates in the first quarter. The region accounted for around 17 per cent of sales and trading profit last year, a figure that will only grow. Or shareholders could focus on Europe, which contributed 16 per cent of sales and 15 per cent of trading profits in 2010-11. In the first quarter, the supermarket giant grew sales in the region by 9.5 per cent.
Sure, the UK still accounts for two thirds of revenues and three quarters of trading profit, but Tesco is still seen as more British than it actually is (a redesign of the red, white and blue logo might be a good idea too). Virtually all its growth will come from abroad in the future – it truly is an international beast.
Alas, the most closely watched number is UK like-for-like sales excluding VAT and petrol, which fell 0.1 per cent in the first quarter against expectations for modest growth of about 0.5 per cent. That performance was partly explained by a five per cent decline in sales of non-food items, with electricals performing particularly badly. Luckily for Tesco, it can re-profile its non-food space to sell more cheap clothes (which are performing well) and fewer flatscreen TVs. The likes of Comet, Best Buy and Currys have no such option.
We have long argued that Tesco deserves a richer valuation, on a par with the truly global retailers like Wal-Mart and Metro. Currently it trades on a price-to-earnings multiple of 10 times 2012 earnings forecasts, a four per cent discount to Wm Morrison and a 10 per cent discount to the higher-yielding J Sainsbury. For that reason, investors should look past the UK weakness and buy into the growth story abroad.