logo-loader

Tesco’s Asia sale indicates transition to “cash compounding stock”, says analyst

Published: 07:05 09 Mar 2020 EDT

Tesco PLC - Tesco’s Asia sale indicates transition to “cash compounding stock”, says analyst

Tesco PLC’s US$10.3bn (£7.8bn) sale of its Thai and Malaysian grocery chains to conglomerate CP Group supports the thesis that the supermarket is “evolving as a cash compounding stock”, according to analysts at Shore Capital.

In a note on Monday, the broker said the sale represented “a good deal”, although they also highlighted that the UK’s biggest grocer was losing “a key growth strand” by offloading the South East Asian businesses.

READ: Tesco promises £5bn dividend after agreeing sale of last Asian businesses

“However, whilst all this is so, we like the idea of a capital disciplined Tesco”, ShoreCap said, adding that they “would not be surprised” to see progress around a sale of the company’s Polish business.

“On balance…we deem this to be good news and it supports our thesis of Tesco evolving as a cash compounding stock. Indeed, in febrile markets, the bolstering of Tesco’s solvency ratios is a particular positive”, the broker said.

ShoreCap’s Darren Shirley added that the announcement also clarified Tesco’s intention to engage in share buybacks using surplus cash, whereas prior to the sale announcement there had been “no explicit guidance” for such a strategy.

Tesco is planning to pay out around £5bn to shareholders in the form of a special dividend using the proceeds from the sale, as well as using £2.5bn to make a pension contribution, which it expects to eliminate the current funding deficit and slash future pension deficit contributions.

Sale poses challenge for Thai regulator

However, while the prospect of a bumper payout may have Tesco’s shareholders salivating, the sale poses a challenge for Thailand’s Office of Trade Competition Commission (OTCC), which in 2017 was granted powers to block transactions that could create monopolies in the country’s economy.

The prospect of OTCC scrutiny is likely given that CP Group, owned by Thai retail tycoon Dhanin Chearavanont, is the country’s largest private company and already control’s around 12,000 7-Eleven convenience stores. If the OTCC approves the acquisition, CP will add another 1,965 Tesco stores to its portfolio.

Given scrutiny of tycoons and their dominance over Thai business is a politically sensitive topic, the OTCC will be under pressure to set clear precedents over when a company is deemed to have too much control over areas of the economy.

“The Thai public is not afraid to express strong opinions towards tycoons. These views have been echoed in parliament and could gain momentum in other industries…The OTCC’s mandate is to protect public interest and market competition and so it will have to set a clear precedence”, Ben Kiatkwankul, partner at Maverick Consulting Group, told Reuters on Monday.

Shares in Tesco were 0.2% higher at 241.1p in late-morning trading.

ARway.ai announces multiple new SaaS developer contracts in both the United...

ARway.ai (CSE:ARWY, OTCQB:ARWYF) Chief Executive Officer Evan Gappelberg joined Steve Darling from Proactive to announce multiple new SaaS developer sign-ups for its augmented reality experience platform, focusing on AR indoor navigation. These partnerships represent significant milestones in...

2 hours, 12 minutes ago