As it tries to recover from years of falling sales and last year’s profit misstatement debacle, Tesco (LSE: TSCO) is slashing costs and cutting prices in an attempt to return to growth.
It seems that this strategy is already starting to work. Data released this morning shows that Tesco’s sales in the 12 weeks to 1 February increased by 0.3%.
Additionally, the company is also looking to sell assets in order to mend its finances. And buyers are already lining up to make offers.
Data analysis
Yesterday it emerged that Tesco was pursuing the sale of a majority stake in its data-gathering arm Dunnhumby.
Until recently, Dunnhumby was a relatively covert part of the Tesco group. The company was designed to help Tesco run its Clubcard scheme and helped Tesco become a world leader in customer data-analysis.
Management is looking to sell around 50% of the business for £500m, hopefully attracting investors that will want to invest in the Dunnhumby brand. This should give Tesco the experience and cash it needs to grow the Dunnhumby brand, which has become a key profit centre for the group, still generating much needed cash.
Asian assets
Dunnhumby is not the only part of the Tesco group that’s attracting attention. One of richest men in Thailand has approached Tesco offering to buy the group’s operations within Thailand.
Tesco, or Tesco Lotus as it is known within Thailand, is one of Tesco’s most profitable overseas ventures. According to bankers, Tesco Lotus could now be worth in the region of £4.7bn to £6.5bn and there are several parties interested.
Even though Tesco’s needs the cash, I can’t help thinking that the group should hold onto its business in Thailand. Tesco Lotus is highly profitable and, just like Dunnhumby, Lotus is a key part of the Tesco group.
Rebuilding
These two deals alone could net Tesco anywhere between £5bn to £7bn, enough to fully fund the group’s £3.4bn pension deficit and pay down a large chunk of group debt. Group net debt stood at around £9bn as of August last year.
And if Tesco does go ahead and offload these assets, the company is going to have plenty of financial fire power to instigate a recovery and take on the discounters.
Still, at current prices Tesco looks to be overvalued as the company’s turnaround is only just starting to take shape. The company currently trades at a forward P/E of 21.1 and earnings per share are expected to fall 65% this year. Growth of just 2% is forecast for 2016 and growth of 24% is expected for 2017.
On that basis, Tesco is trading at a 2017 P/E of 16.3, which does seem expensive when you consider the fact that the company’s profits are sliding and unlikely to recover any time soon.