Dave Lewisis serious about turning aroundTesco(LSE:TSCO). The latest management shake-up, which was announced Tuesday, proves that. What does it also mean?
First, divestments of international assets will likely speed up. Second, Tesco Bank may become a more strategic asset for the group.
International Operations
Noboby is in charge of Tescos international operations, which reinforces the view that large disposals are very likely in 2015. Theyare crucial to support Tescos stock price, in my view.
As you may well know, Tesco miserly failed in the US and Japan. There, its operations were simply too small to become economically viable, and didnt grow quickly enough to justify an appropriate return on investment. The timing of the investment was pretty bad, too. Investors have talked for years about the huge potential offered by emerging markets.
But take China, for instance, where the retail market is highly fragmented and high returns are unlucky with little scale. Tesco has swapped international assets with rivals over the years: the same wont happen in China, given that strategic joint ventures with domestic partners are the only way to enter the market.
China Resources Enterprisereported a loss in the third quarter as it incurred costs from merging its store network with Tesco Plcs chain in Chinaand the countrys austerity measures hurt retail sales, Bloomberg reported in mid-November.
More broadly, the problem with Asian assets, which account for less than one fifth of the groups revenue, is that they will unlikely fetch a top valuation, in my opinion. Yet the New Tesco doesnt need them, so itd be a good idea to get rid of them sooner rather than later.
Tesco Bank
Along with his duties at Tesco Bank, Benny Higgins will also oversee the groups strategy, it was announced on Tuesday. A partial float ofTesco Bank may become more likely, although I think an IPO of Tescos banking unit has never been a high priority for Mr Higgins.
Mr Higgins is a banker, who was rumored to be among the runners to replace Stephen Hester at Royal Bank of Scotland last year. Hewill likely take a cautious approach to the groups strategy, but at the same time Tesco Bank may try to compete more aggressively with other retail banks. Well see how that one goes.
Other changes to the executive committee have been made. If Dave Lewis is quick to find a solution for Tescos international assets, while focusing on the UK operations, for which hell be in charge on a temporary basis, Tesco stock could comfortably trade above 200p for most of 2015. Response from investors has not been not overwhelming, however, and the shares of Morrisons and Sainsburys have performed much better than those of Tesco in the last couple of days.
Investors should focus on Tesco’s “restructuring potential” — how quickly Mr Lewis will turn around the business — and the value of Tesco’s assets, rather than on earnings and cash flow generation, based on which, a valuation of 100p a share is conceivable.
A couple of other companiesmentioned in this reportoffer restructuring potential, but onesmall cap whose shares haverallied in recent times should also be on the radar!
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
