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Tesco is expected to announce plans to return capital to shareholders when it announces its half-year results on Wednesday, as the UK’s largest food retailer wants to explode a share price that has lagged behind competitors.
Shares in the group have been the worst performers so far this year among the three listed food retailers in the UK, despite the growing operating momentum.
In contrast, shares in J Sainsbury gained nearly 30 per cent. That of Wm Morrison, which was the subject of a takeover battle won by US private equity group Clayton, Dubilier and Rice on Saturday rises more than 60 per centt.
Yields also lagged behind those of continental peers such as Ahold Delhaize and Carrefour. Yet analysts say Tesco, which flourished during the pandemic when bars and restaurants had to close for long periods, is increasingly dominating its home market.
“For the first time in more than a decade, we believe Tesco is in real condition,” said Andrew Porteous, an analyst at HSBC. ‘The previous team laid the foundation in the restructuring of the business model and began to refine the commercial offering, but new management did. . . really sharpened the business and drove sales ”.
According to research group Kantar, it is the only one of the Big Four groceries that has maintained its market share since the beginning of 2020; The competitors Asda, Morrisons and Sainsbury’s ceded it all, mostly to Aldi and Lidl.
Since sells its Asian operations in March – and with a special dividend repaid £ 5 billion to shareholders – Tesco reduced its debt and tightened its pension system with dedicated benefits. Both measures will increase its future profitability and cash flow.
William Woods, an analyst at Bernstein, said Tesco is winning on several fronts – gaining share in almost every region of the UK and among all age groups and social classes.
The renowned Clubcard, which now offers holders big discounts on popular rules rather than the chance to collect points, has helped drive loyalty and recruit new customers.
“It’s very difficult to find a problem with execution, supply or customer appetite,” Woods concluded.
One of the reasons why this momentum did not boost the shares is that Tesco, with a market value greater than Morrisons and Sainsbury’s combined, is considered by many to be too large for a takeover of private shares.
“That would be a big problem, even though the liquidity is there, it’s possible,” said Clive Black, research director at Shore Capital. “But the market puts a fairly low probability on it.”
Black thinks the company will use the half-year results to set up a runway that draws investors’ attention to the £ 1.5bn free cash flow it can generate each year.
“I do not think they will buy back immediately after the results, it is more likely to come in the spring,” he predicted, pointing out that finance director Imran Nawaz was relatively new to the post and that it was a matter of concern. is about food price inflation. can also cause some caution.
Food retailers are experiencing significant cost pressures from rising commodity prices, bureaucracy associated with Brexit and higher wage costs, especially for truck drivers.
In the late 1990s and early 2000s, Tesco dominated British food costs with £ 1 in every £ 8 spent in British shops. Its influence was so great that its apostates called it ‘the Tescopoly’.
But Tesco experienced a spectacular decline in 2011, losing customers, ending up in an accounting scandal and finally announcing one of the biggest UK losses in 2015.
Black believes that it is unlikely that the dominance it enjoyed in its splendor can regain, given how entrenched the negotiators in Germany have become in the United Kingdom. “They’re going to keep British supermarkets honest,” he said.
Tesco declined to comment.