Only days into his new job, Ken Murphy presented his first set of result as boss of Tesco last week — and they weren’t a bad way to start (Ashley Armstrong writes). Britain’s biggest retailer has been encouragingly resilient through the coronavirus pandemic. The question now is: what will he do next?
Whatever it is, he will have to go some to match the dramatic early efforts of Dave Lewis, his predecessor. Shortly after his arrival, Mr Lewis, 55, had to set about reviving the supermarkets group after an accounting scandal, selling off assets, including its interests in South Korea, and ditching distractions such as Giraffe, the restaurant chain, and Dobbies, the garden centres business.
After firefighting for the first three years of his tenure, the last three were focused on the battle with the discounters, striking a deal with Booker, the wholesaler, and — shortly before he left — there were early signs that Tesco was starting to flex its technology muscle.
In short, Mr Murphy, 53, has been handed a stable business in what are historically unstable times. Tesco is well capitalised, with £2 billion of cash on the balance sheet. Despite an expected £725 million of costs relating to Covid-19, including the hiring 40,000 of extra staff, most of these costs have translated into higher sales. Fuel and clothing sales have fallen during the pandemic, but bigger grocery baskets, helped by the return of the big weekly food shop, have more than offset this.
Tesco also has more than doubled the number of online orders it serves from 650,000 to 1.5 million a week as digital growth has soared by 68.7 per cent. A fifth of these orders are click-and-collect, which helps to boost the profitability of online orders.
Mr Murphy has signalled that the launch of Tesco’s so-called urban fulfilment centres (the first of which has opened in West Bromwich in the West Midlands) will be a game-changer. The centres, built at the back of its larger Extra stores, are semi-automatic, with conveyor belts of groceries bringing products to pickers rather than workers running around the aisles to track down items for a customers’ order. The new boss said that he believed online growth was “here to stay”, so it was crucial for the company to ensure that it could find a way to serve online profitably, without simply increasing delivery fees. In which case he may explore licensing Tesco’s picking technology, taking a leaf from Ocado’s book, which could propel the share price.
The supermarket said last week that it expected retail operating profits to be “at least” the same as the £2.3 billion of last year and it is ploughing ahead with a progressive dividend policy. Investors will be getting a £5 billion special dividend — equivalent to around 51p per share — as part of its commitment to return cash from the impending sale of its Thai and Malaysian businesses.
Rather than bringing about any revolution, Mr Murphy said last week that he was very happy with Tesco’s present direction. He ruled out selling Tesco Bank or retrenching or expanding abroad or changing its existing pricing strategy. Yet for all the plaudits heaped on Mr Lewis for pulling the supermarket away from its accounting black hole, the share price has stagnated and at 222½p yesterday is little above when he first took the helm. “Right now the organisation isn’t focused on change, it’s focused on delivery,” Mr Murphy told analysts last week.
The new Tesco boss has enough to keep him busy in the next couple of months as he will be focused on Christmas, navigating Brexit and then returning a bumper special dividend. After that, though, he’ll have to come up with a more exciting way to boost the share price.
Advice Buy
Why Market undervalues special dividend and strength of the business
CRH
Given the state of the global economy as countries continue to struggle with the pandemic, there is a curious array of multinational FTSE 100 industrial stocks that haven’t merely recovered quickly from the initial coronavirus market crash but have pushed on to new heights (Robert Lea writes).
Typically, they are not household names. Halma, Spirax-Sarco and Croda are three whose products and output are deemed crucial to global trading whatever the economic weather and the outlook for the world’s health. To their ranks you can add CRH.
Originally an Irish construction materials company, it has become a pan-North American and pan-European player. And although perhaps not resonating with the public in the way that some companies do, it is Ireland’s biggest business, making more money — even in the good times — than Ryanair or Guinness. It is the product of a merger in the distant 20th century between Cement and Roadstone. In the UK it is best known as the owner of Tarmac.
The company has become a behemoth with annual turnover of $28 billion and pre-pandemic pre-tax profits of $2.1 billion. Having grown by the acquisition of smaller regional outfits, it is split roughly 36 per cent in American construction, 36 per cent in European construction and 28 per cent in building materials in the United States and Europe. Its profit margins are in the 15 per cent region, which compares conspicuously with the wafer-thin margins that the companies actually doing the construction exist on.
At its half-year results — at which it paid a dividend — the numbers were at previous-year levels and it expected the third quarter to be a similar story, even if the final quarter was a little cloudier. However, since bouncing back by mid-summer, the shares have been sashaying sideways, which has surprised some in the City who believe that a post-US election infrastructure spending splurge is guaranteed, irrespective of who is voted into the White House.
The stock, down 51p, or 1.7 per cent, today at £29.86, is trading on less than 15 times prospective earnings and is expected to yield more than 3 per cent.
Advice Buy
Why One of the stocks shrugging off the pandemic
