Shares in Tesco (LON:TSCO) have been little changed in 2018, albeit outperforming the benchmark FTSE 100, with investors focusing on the group’s tie-up with wholesaler Booker Group which completed during the year. Going forward, however, the enlarged company is set to face headwinds amid ongoing competition from German discounters Aldi and Lidl and the threat of a possible tie-up between ‘Big Four’ rivals J Sainsbury (LON:SBRY) and Walmart’s Asda, whose merger has the potential to create Britain’s biggest supermarket, overtaking Tesco.
Booker tie-up completed in 2018
Tesco entered 2018 with investors awaiting the completion of the group’s tie-up with wholesaler booker. The deal wrapped up in March, more than a year after it was first announced, with shareholders in both companies okaying the tie-up despite previous worries over the rationale of the deal.
The acquisition seems to already be paying off, after Tesco’s most recent results, published in October, revealed a 24.4-percent rise in operating profit. Sales surged 12.8 percent to £28.3 billion, with UK like-for-like sales rising 2.3 percent and Booker’s LFL sales up 14.7 percent. At the time, Tesco’s chief executive Dave Lewis said that the company was ‘delighted’ with the wholesaler’s performance.
What next for blue-chip grocer?
While the Booker tie-up was one of the most important factors for Tesco in 2018, next year Britain’s biggest grocer is facing the threat of the Sainsbury’s-Asda merger which is currently undergoing a competition investigation. Tesco recently demanded ‘extensive remedies,’ and questioned the rationale between its rivals’ tie-up, suggesting that it could lead to higher petrol prices in some areas.
Despite the Sainsbury’s-Asda merger threat, 2019 is unlikely to be all doom and gloom for Tesco investors, with Interactive Investor recently reporting that UBS analyst Daniel Ekstein believes that there is a ‘reasonable possibility’ that management could begin a share buyback next year.
“We don't think management intends to retain ‘excess’ cash on the balance sheet, meaning alternative methods of capital return are possible,” he pointed out, adding that pulling the trigger would “send a strong signal and create shareholder value in a low-risk manner”.