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Tesco shares slumped by more than 8%, falling the most since the summer of 2017 after first-half adjusted operating profit at the UK’s largest supermarket came in at £933 million, short of analysts’ expectations for £992 million. The earnings miss was driven by weakness in Poland, stemming from a ban on Sunday trading along with a disappointing performance in Asia, which saw profit slump by 29% to £100 million in the first half with sales in Thailand declining by 5% in the second quarter (Q2).
In its earnings statement, Tesco said, ‘in Thailand, the combined effects of sales deleverage, price investment and renegotiation of promotional investment as we reposition our offer have impacted Asian profits in the first half. We expect this impact to continue in the second half’.
Eric Moore, income fund manager at Miton Group, told IGTV, ‘the market is being quite harsh today’. However, he warned that with Asia accounting for more than 10% of the group’s business, the sharp profit decline in Asia has the potential to ‘make a mess of the numbers’.
Despite the group operating miss, the UK was a bright spot. Q2 like-for-like sales in the UK rose by 2.5%, ahead of estimates for 2.2% growth. CEO Dave Lewis said, ‘we have made a good start to the year. The step up in Q2 is driven mainly by the UK and ROI and delivers our eleventh consecutive quarter of growth’.
The supermarket hiked the interim dividend by 67%, to 1.67p per share, ‘targeting around two times earnings per share (EPS) cover in the medium term’. Meanwhile, the operating margin hit 2.94%, which would have risen to 3.02% if the Tesco Direct closure were excluded. Tesco said it remains on track to reach its margin ambition of 3.5-4% by fiscal year 2019-2020.
The wholesaler, Booker, which Tesco acquired in March, saw like-for-like sales up 14.7%, adding £97 million to its overall first-half profit, generating £16 million of synergies. Miton Group’s Moore described Booker’s performance as ‘tremendous’.
Beyond Tesco, Moore’s top UK supermarket is Morrisons, which is the only stock in the sector that the FP Miton Income Fund holds. On Sainsbury’s, Moore says he is concerned it could take its eye off the ball amid the investigation into its tie-up with Asda.