Customers wandering around their local Tesco superstore may have difficulty working out how the nation’s biggest grocer came to be in such a mess, the accounting scandal aside. The stores seem busy enough, the tills active, the car parks full.
Halfway figures from the UK and Irish stores make it clear. Operating margins at these plunged to below 0.8 per cent in the half-year to August 31, from 2.5 per cent last time. This is astonishingly low. Tesco used to shoot for above 5 per cent, admittedly in a different world. The core of the group is barely profitable, then.
As it is, profits from that business fell from £543 million to £166 million. Tesco is having to invest in cutting prices — retailers formally refer to this as investment, oddly — and to take on more staff serving the customer to rebuild its position. It says that all the benchmarks it uses, such as customer loyalty, cash and supplier satisfaction, are moving in the right direction and this will create a virtuous circle that will rebuild the performance all around. But it looks like being a long process.
Borrowings, even excluding pensions and lease obligations, are at £5 billion, even after the sale of the South Korean business for £4.2 billion. Tesco believes that it can use its cashflow to bring this figure down to a manageable level, without recourse to a rights issue. It also is sticking to earlier profit guidance for the year. Meanwhile, halfway profits across the group were almost wiped out by interest costs and tax. Plainly, the next dividend is a long way down the line.
The company has suggested it may have to make further cost-cuts — sorry, “invest further” to enhance competitiveness — given the growing encroachment of Aldi and Lidl, with their low-cost model. Tesco is reacting by halving capital spending, but there is a limit to how far this can go before the average store looks like an Aldi or a Lidl, only more expensive.
Add to this the potential for damaging class actions in America and Britain, as alluded to in the halfway statement, because of the accounting scandal. The shares, up 4¾p at 197p, are still trading at the bottom of their range. On a price earnings multiple of well above 30 this year, this is for gamblers only.
Sales £23.9bn Dividend nil
My advice Avoid for now
Why Tesco is seeing all the relevant metrics heading in the right direction, but it looks like being a long haul with dividends some way off
On any other day Diageo’s tidying up of its brewing portfolio in Jamaica, Malaysia, Singapore and Ghana with Heineken, its partner, would merit plenty of attention. It was rather drowned out by the SABMiller approach from AB InBev.
As chance, or the global beer market, would have it, Diageo has just restructured a South African joint venture that was designed to take on SABMiller on its home territory. The global drinks group also sold the decidedly non-core Gleneagles hotel and golf resort in the summer and is widely expected to announce shortly the disposal of its wine brands, including Blossom Hill and Piat d’Or.
Diageo is getting out of brewing Red Stripe in Jamaica and is selling its Malaysian and Singapore brewing business. It is raising its stake in Guiness Ghana Brewers. This cements the company’s position in a second large African market for beer, after it moved to increase its share of Guinness Nigeria in the summer. Diageo is convinced that Africa is a source of long-term growth as consumers switch to well-known western brands.
If, as some have been suggesting this week, commodities and so emerging markets have turned the corner, Diageo will be a beneficiary. There are also hopes that the United States, a weak market as consumers switch to more niche brands, may return to growth.
Diageo shares, off 25½p at £17.93½, sell on an expensive 21 times’ earnings, but, with the support of a 3 per cent plus yield, could be worth a long-term punt.
£440m proceeds from three deals
My advice Buy long term
Why Shares are highly rated but trading recovery likely
Gemfields’ strategy is easy enough to understand, but it is a hard company to value. It produces precious stones bought by the affluent middle class worldwide — in emerging markets such as Brazil and China, where one might expect some lessening of consumer demand, and in America and Europe, where that demand has held up.
The results for the year to June 30, then, looked surprisingly good for the natural resources sector, with record revenues and gross profits flat at $85 million after heavy investment in its ruby mine in Mozambique and in teams on the ground in Sir Lanka, Ethiopia and Colombia seeking out fresh deposits.
Production was up by almost 50 per cent at its most important asset, the Kagem emerald mine in Zambia, and estimates carried out at Gemfields’ mines suggest reserves worth well in excess of the company’s value. The complicating factor is its ownership of the loss-making Fabergé business. This, too, is taking further investment, moving into less expensive watches and increasing points of sale by a third.
I like Gemfields as a long-term play in a growing market, even if the promise for Fabergé is as yet unclear.
$153m revenues from six auctions
My advice Buy long term
Why Company is in a niche and growing market
And finally . . .
Cavendish Square Partners has finally sold out of Polypipe, the plastic pipes maker that was floated in spring last year. The private equity house’s holding initially had hung over the shares and held them back, on the fair assumption that one day it would be sold. A 10 per cent stake went out in December; the remaining near- 8 per cent went through the market in a placing yesterday with little difficulty at 315p. The shares were floated at 245p, so Cavendish has done well enough out of its initial investment.
