Right time to add Tesco to the shopping list

Workspace; GeneMedix
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The Independent Online

For a stock which has looked such a compelling growth story, Tesco's performance in 2001 was a disappointment. The shares drifted from their peak of 286p at the end of 2000 to around the 240p mark as investors chased the J Sainsbury recovery and waited to see if Tesco's overseas expansion programme would bear fruit. This year, we find out.

Yesterday's trading update contained no details beyond saying management remains confident that it will deliver results "broadly in line" with expectations. That means full year profits of £1.22bn when the company reports on 9 April.

So is this the time to buy back into Tesco? The overseas business remains the key issue as Britain's biggest supermarket pushes into developing markets such as Thailand, Malaysia, Hungary and Poland. Losses of £14m were recorded in the first full year followed by £9m profits last year. But growth is forecast to start coming through strongly from here on in, with £51m profits forecast for the year just ending, rising to £136m the year after that. Analysts say this would help deliver earnings growth of 13-15 per cent a year over the next three years, which is impressive for the supermarket sector. Growth like this could see a further spurt in the share price, possibly to as high as 350p with European investors switching from continental rivals such as Carrefour and Ahold.

Ironically the concerns about Tesco of late have been over its UK operation rather than its overseas adventure. Some stores are starting to look a bit shabby, and the group botched the introduction of a new stock ordering system. Then there is the Sainsbury's recovery with Sir Peter Davies boasting last month that his group had started to take customers away from the market leader while reporting better like for like sales growth for the first time in years (6.8 per cent against Tesco's 6.2 per cent) .

But if would be a surprise if Sir Terry Leahy and Tesco's management team took their eye off the ball at home while chasing glory abroad. And the latest £70m of price cuts shows the new knight is keeping up the pressure. The shares were off 4.25p at 247p yesterday and trade on a forward price-earnings multiple of 20, falling to 18. Buy.

Workspace

So when exactly is the UK going to see the big rise in small business bankruptcies and unemployment that one would expect to accompany an economic slowdown? The relatively robust performance of UK business has confounded gloom-mongers and, it has to be confessed, this column, but it remains much too early to conclude that a company like the property group Workspace, whose fortunes are bound up with those of the small business sector, has beaten the worst.

Far from it. A fall in occupancy levels, to a still impressive 89.1 per cent, had more to do with renovation work than with bankruptcies or downsizing among its tenants. But business failures lag the economic cycle as troubled companies cling on for dear life, and it will take a clear economic rebound before Workspace's investors can sigh with relief.

Things are OK on the evidence of yesterday's figures for the nine months to 31 December, when pre-tax profits rose 24 per cent to £8.53m. That masks a sharp decline in third quarter profitability, but the company insists this is due to refurbishment and rebranding work on the latest additions to the portfolio. Workspace is half-way through a £100m splurge on property in London and the South-east, where most entrepreneurs set up shop.

Analysts reckon on 50p per share of earnings for the full-year. That figure rises to 55.8p in 2003, when the property portfolio – always shrewdly managed – is forecast to have increased in value to 1,580p per share. The stock, up 2.5p to 1,230p, is expensive relative to both measures, and should be avoided until a UK recovery.

GeneMedix

The first generation of biotech drugs, based on the body's own immune system, are among the most expensive on the market, and European health authorities are crying out for cheaper copies. Gene-Medix plans to provide just that when patent protections start expiring in Europe in 2003. Results yesterday showed a loss of £1.6m last year, as forecast, as it invests in factories in Ireland and the Far East.

Its first copycat product is already on the market in China. That will provide handy, if small, revenues keeping losses flat this year. It should also help persuade European regulators that copycat drugs don't need to undergo the sort of full-scale human trials that the originator companies had to pay for. Break even could come in 2004 after the first European launches and although delays are possible, nay likely, the shares, at 47.5p, are worth a punt.

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