Investment Column: Bullish Tesco gets set for American challenge

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The Independent Online

Our view: Buy

Current price: 479.75p (-7.25p)

Tesco is the company everybody loves to hate. Pick your gripe – independent retailers accuse it of putting them out of business, suppliers grumble about their treatment at its hands, while consumers say that they are guilty of eroding the character of the high street.

But the fact is that Tesco is the place most of us prefer to shop. The figures speak for themselves – the chain enjoys a massive 32 per cent of the UK grocery market. Though consumers may like the idea of locally sourced products bought at the local shop, for the weekly family shop, punters flock to the supermarkets in droves, and Tesco is the most popular by far.

The Competition Commission delivered its long-awaited provisional findings on the supermarket sector last week which was expected to come down heavily on Tesco. But although it expressed general concerns about land banking and the supermarket code of practice, it did not single out Tesco and instead said it was not in such a dominant position that others cannot compete.

This week the Tesco juggernaut begins its aggressive assault on the US market with the official opening of its first six stores under the Fresh & Easy brand in California. Having conquered the UK, international expansion seems the obvious place to go for further growth.

But the States has been notoriously hard to crack for UK companies and many see this as the biggest challenge for chief executive Sir Terry Leahy's career to date. But he doesn't do things by halves. He plans to have 50 stores opened by the end of the year with 150 pencilled in for the next.

Analysts believe the format will meet a growing need in the US for fresher foods and smaller, and closer to home shopping trips and are estimating a successful Stateside business to be worth 40p a share.

Tesco is currently trading at around 19 times forecast earnings for 2007 which, although not cheap, is a discount to its rivals. However, it should maintain its dominance and is worth a premium. Buy.

LogicaCMG

Our view: Hold

Current price: 151.75p (-4p)

It has been a tough year for LogicaCMG. After spending the past few years dealing with continental problems, trading in the UK has deteriorated triggered by a disastrous implementation of a project for T-Mobile that ultimately cost Dr Martin Read, its long-term chief executive, his job.

Yesterday LogicaCMG again lowered its growth forecasts for the year, with revenue growth now seen at 3 per cent – half its original top-end guidance – and margins likely to be a touch below guidance. Although the company's hard work in France has started to pay off after an 18 per cent spurt in revenue, the performance in the UK where sales fell 8 per cent caused consternation.

LogicaCMG's woes are well known and all eyes are on Andy Green, the ex-BT Global Services leader, who takes the reins in January. Mr Green's appointment has been widely applauded after he led the turnaround of BT's IT services division which has been crucial to the telecoms company's revival. With the "CMG" suffix being dropped early next year, investors are hoping Mr Green's appointment represents a new dawn for the UK IT services stalwart.

There are still plenty of bears but the arrival of Mr Green has raised hopes that the future is bright for the UK's best-known IT brand.

However, it is likely that it will take some time before the stock is on the up again despite its long-term potential. Few would bet that yesterday's warning is the last and with a serious amount of work to do to get the company back on the straight and narrow, there may be better entry points for investors. Hold.

Dhir India Investments

Our view: Buy

Current price: 173.5p (+7.5p)

Considering an investment in Indian distressed debt right now might be considered as financial suicide, and given the state of the credit markets, that view has some merits. But since coming to the markets in July, raising £25m in the process, Dhir India Investments has performed well and another acquisition yesterday hints that there could be more in store for braver investors.

The company was set up in order to invest in distressed Indian manufacturing and land assets – taking control of those assets by buying up non-performing loans. The company has local expertise, crucial in turning around a distressed asset, and managing director Alok Dhir has a solid track record of making excellent returns on Indian assets.

Yesterday's deals were £800,000 in an edible oil refining facility in Gujarat and £1.4m in an insolvent hotel development in Goa. Although neither deal is large it makes no sense to bust the bank on early deals, and both have good turnaround potential. The company expects to sell off the land at Goa within the next 12 months without adding to its initial investment and the oil refinery should be sold within the next three years after an extra £1.15m is invested in the project.

Since listing Dhir has made five investments, with potentially 10 to 15 before becoming fully invested. Although on the face of it this is a high risk investment, the risk that all of these projects will fail is small. But as a play on the Indian economy, it is about as low risk as investors could hope to find and even if growth slows Dhir has the people and the expertise to provide investors with decent long-term results. Worth tucking away.

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