Tesco shares on brink of breakthrough despite Clubcard snag

Updated 1232 BST

Tesco shares were set for a fresh bout of concerted weakness on Wednesday as crucial asset disposal plans looked to be at risk of unravelling.

The stock fell as much as 2.7% in the opening minutes of trade after reports that Britain’s leading grocer in terms of market share, albeit ever-decreasing, might have to lower the price it wants for Dunnhumby, the unit which operates Tesco Clubcard.

Not quite done with Dunnhumby

So much emphasis is being placed on Tesco’s asset sales because its retail performance remains precarious.

That’s despite the clean slate new CEO Dave Lewis gave himself at the start of the year by ‘kitchen-sinking’ the business into a multi-billion pound annual loss, Tesco’s biggest ever.

Closely-eyed like-for-like grocery sales at its supermarkets inched just half a percentage point back towards the flat line during the company’s first quarter of the year, but they were still 1.5% lower than the same quarter a year ago.

The reading doesn’t require statistical or sophisticated financial formulas to dismiss as showing negligible progress.

With earnings static, and Tesco the most indebted of the Big 3 UK grocers (its total debt was worth 179% of its equity in February) Tesco could be forced to raise capital, and that would probably trash its stock further.

CEO Lewis stressed that Tesco would attempt to sell non-core assets before considering the worst option.

Selling Dunnhumby, bought by Tesco in increments during the 2000s for an undisclosed sum, was widely seen as a quick and profitable alternative.

The main sticking point to a sale though was that the Clubcard operator has had an independent agreement with US retailer Kroger for years.

In the end, Kroger agreed to purchase the most important assets housed in Dunnhumby’s US operations in April, including rights to the brand name ‘dunnhumbyUSA’.

This obviously stripped some value off the remainder of the group, which can still operate in the US, but will no longer have access to data on shoppers at Kroger, the US’s biggest retailer in revenue terms.

Initial figures mooted for a takeout price of the business were as high £2bn, but forecasts were lowered to as low as £600m in light of the snags.

£600m would still be a generous multiple taking into account the latest even more pessimistic assessments of the business’s earnings, now widely seen as closer to £60m per annum rather than previous estimates above £100m.

Clubcard  was never the trump card

The counterpoint to renewed scepticism about Tesco’s ability to right itself with asset sales is that Dunnhumby has always been of relatively peripheral value.

The main chance on the asset sales front has been Tesco’s retail businesses in East Asia, particularly South Korea.

Tesco officially put its Homeplus business there on the block in July, with an all-private equity shortlist.

It included Affinity Equity Partners, Carlyle Group, Goldman Sachs’ PE arm, KKR and MBK Partners.

With a potential price of around $6bn, Homeplus, the second largest retailer in South Korea, looks like Tesco’s best and fastest chance to cut debt and fund its turnaround.

There have however, also been niggles in the sale process for Homeplus.

On Tuesday, the deadline for the next round of bids was reportedly extended to 24th August from 17th August previously.

Head and shoulders washout?

But if Tesco manages to get shot of Homeplus, there’s little doubt its share price loss on Wednesday will look like small change.

Having fallen below the neckline (~223p) of what looks like a reverse ‘head and shoulders pattern’ in May, Tesco stock is currently sitting on a line where support was found in June and mid-July.

If the support holds, the stock’s next task would be to get above the line that links the top of the ‘shoulders’, which has now turned into resistance.

Above that, the stock, which is still down 45% over the last two years, would very likely be over its worst—having hit an all-time low of 163p in December 2014.

Once the neckline itself is passed again on the upside, the H&S complex ought to offer formidable support for the further challenges the firm and its shares will face in the medium term—probably plenty.

Tesco daily chart

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