Ahold, Tesco to highlight growth ambitions

Fri 13 Nov, 2009 15:55

By Mark Potter

LONDON (Reuters) - Two of Europe's top retailers, Britain's Tesco (TSCO.L) and Dutch group Ahold , will highlight their long-term growth ambitions next week in moves that could lift their lowly-valued shares compared to peers.

Ahold, which makes about 60 percent of its sales in the United States, is expected to unveil a cost-cutting plan which analysts think could be worth up to 500 million euros (446 million pounds) over three years.

The group, which reports third-quarter results on Wednesday, will also come under pressure to spell out its plans for a cash pile of over 2.5 billion euros.

Tesco, the world's No.3 retailer behind France's Carrefour and U.S. leader Wal-Mart

Also on Thursday, Britain's Wm Morrison Supermarkets (MRW.L) is expected to report a slowdown in third-quarter underlying sales growth, in line with rivals which are all feeling the affects of a drop in food price inflation.

In parts of Europe and the United States, lower food price inflation has turned to deflation, putting pressure on groups like Ahold.

Last month, the Dutch company reported a slowdown in third-quarter sales growth and the first quarterly decline in underlying sales at its market-leading Albert Heijn chain in the Netherlands for around six years.

However, analysts are still on average pencilling in a 3.4 percent rise in third-quarter operating profit to 271 million euros, thanks to a tight grip on costs.

Ahold, which trades from over 3,500 stores in 11 countries, is coming to the end of a three-year plan to cut costs by 500 million euros, and analysts are waiting for a new plan to be unveiled which they expect to total around 300 to 500 million.

Earlier this month, the group said it was freeing up two of its most senior executives from day-to-day management responsibilities, fuelling speculation it is stepping up the search for acquisitions.

RBS analysts think Ahold is likely to use its cash on a mix of bolt-on acquisitions and returning cash to investors.

Ahold shares have underperformed the DJ Stoxx European retail index by 23 percent this year and Credit Suisse analysts think news on cost savings and long-term growth ambitions could be catalysts for them to move higher.

The stock trades at 11.1 times 2010 earnings forecasts, below the index average of 13.9, according to Reuters data.

TESCO BANK

Tesco shares trade at a more modest discount to the sector, at 13.1 times 2010 earnings forecasts, and have underperformed by 3 percent this year.

Part of this is due to doubts about the group's ambitious growth plans, which span expansion in China, India, the United States and a push into financial services in Britain.

Tesco, with over 4,300 stores in 14 markets, said in July 2008 it planned to make annual profits of 1 billion pounds from its retail services unit, which includes telecoms, online and home shopping as well as banking, within a few years.

Assuming a five year horizon require compound annual growth of 20 percent, according to Bernstein analyst Chris Hogbin.

However, he notes that analysts' current consensus forecast compound annual growth of 9 percent for Tesco Bank to 2011/12 and thinks next week's seminars could trigger upgrades.

Analysts will be looking for more detail on when the group plans to launch current accounts and mortgages, and whether it might be interested in picking up assets that state-backed banks are being required to sell by regulators.

Retail services chief Andrew Higginson told the Guardian newspaper last month that Tesco was not interested in buying assets from Northern Rock and dampened speculation of other deals by saying "organic growth is best."

Morrison is expected to report a 4.6 percent rise in sales at stores open at least a year, excluding fuel and VAT sales tax, for the 13 weeks to November 1.

That would be down from a 7.8 percent in the first half, but a healthy performance compared with rivals, whose recent results have not included the most recent falls in food price inflation.

Asda, Britain's No.2 grocer, posted a 5.6 percent rise in underlying sales for the three months to September 30, while J Sainsbury (SBRY.L) reported a 5.4 percent increase for the 16 weeks to October 3 and Tesco a 3.1 percent rise for the three months to August 29.