UK Edition
Questor: buy Tesco – its recovery is accelerating, but the shares remain cheap for now
Since we tipped Tesco in this column six months ago, the supermarket’s recovery has confounded its critics, and the shares have risen 26pc.
Our original thesis was that Tesco was delivering on a promise to pay closer attention to its customers, and that improved product quality and availability in addition to improved prices would drive growth.
That was borne out in a strong set of full year results last week. The supermarket saw pre-tax profit growth of 795pc compared to the previous year (from £145m to £1.3bn), exceeding analyst expectations and sending Tesco shares to a three year high.
Investors yet to buy may rightfully ask whether they have missed the boat.
James de Uphaugh, manager of the £880m Majedie UK focus fund, which has Tesco as its top holding, said that the share price is still cheap “for what is a market leader in the UK with almost 30pc market share, and good overseas businesses”.
He explained that in the three years since chief executive Dave Lewis joined and set about “rehabilitating” Tesco, the company’s market share, customer loyalty and brand perception have all improved. Its debt level has also fallen.
“Superstores, long seen by investors as dinosaurs, have been the juggernaut driving the growth. The relaunch of its own label products can accelerate growth further, and the growth of discount supermarket rivals is slowing,” he added.
Tesco has also completed a £4bn takeover of Booker, the country’s largest wholesaler, which is expected to lead to significant cost savings and additional opportunities for growth.
Mr de Uphaugh explained that retailer recoveries can be sustained once they gain momentum, and that Tesco’s “still has legs”.
Questor says: Buy
Ticker: TSCO
Share price at close: 236p
Update: Shire
We rated specialist drug maker Shire as a buy a year ago at £47.52, and again last September at £39.25.
The shares have sunk 24pc in a year, due to concerns about debt levels following a major acquisition, and the threat to its haemophilia medicine business posed by rival Roche. Shire is a top 10 holding in Aberdeen Standard Investments Global Advantage fund.
Iain Pyle, of the firm, explained that the market “isn’t recognising the quality in other parts of the business such as rare diseases and immunology”.
Shire’s share price has increased from £30 to £36 recently, after Japanese pharmaceutical firm Takeda announced its interest in bidding for the firm, but it still trades at less than 10 times forecast earnings for 2018.
“Shire is at a significant discount compared to the sector. The fact that a company is out there looking at it shows that the industry recognises value in the company where the market doesn’t,” said Mr Pyle.
He explained that a higher share price should be expected if a bid is made, but that the shares are “cheap without a bid” too.
Questor says: Buy
Ticker: SHP
Share price at close: £36.22
Update: Polypipe
Since we tipped Polypipe, which makes recyclable pipes, as a buy last month, it has released its full year results – including a 3.9pc increase in pre-tax profits and a near 10pc increase in its dividend.
Charles Montanaro, who holds Polypipe in his Montanaro UK Income fund, said: “They were record results, although the infrastructure side of the business had slower sales, due to the collapse of Carillion, and the Qatar trade embargo is affecting its Middle Eastern business.”
He explained that the firm “has more infrastructure projects coming through”, and will soon compete in a new area of the market.
“The idea of plastic piping is to replace concrete alternatives. What Polypipe is now able to do, for the first time, is compete on price with concrete pipes in the 700mm to 900mm range, which is a £30m* market,” he said.
Questor says: Buy
Ticker: PLP
Share price at close: 387p
*A previous version of this article incorrectly stated the figure as £30bn.
- Read Questor’s rules of investment before you follow our tips. twitter.com/DTquestor