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Tuesday, July 21, 2015

Is Tesco Malaysia up for sale? – MaxMonster Analytics

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Reuters recently reported that Japan’s biggest retailer Aeon Co Ltd is interested to buy the operation of Tesco Stores Malaysia Sdn Bhd (Tesco Malaysia) in a deal that is estimated to worth £900 million (RM5.29 billion).
The price tag quoted is 1.18 times higher than Tesco Malaysia’s total assets of RM4.48 billion in 2014.
The move to sell Tesco Malaysia was said to follow suit by British-based Tesco plc, which had hired London-based bank HSBC to study the option to sell Tesco’s wholly-owned stores in South Korea – Homeplus Co Ltd and Homeplus Tesco Co Ltd – for up to US$7 billion (RM26.55 billion).
As at February 28, 2015, Tesco’s total debt stood at a whopping £21.7 billion on increases in both net debt – which totalled £8.48 billion – as well as its pension liability. Despite staggering debts, Tesco has a strong cash balance of £2.16 billion.
Tesco is currently battling against a series of accounting scandal, massive write-downs, and plunging market share as it lose to discount chains such as Aldi and Lidl.
Accounting gaffe
To recap, Tesco’s saga began in September 2014, when it announced that it has overstated its expected profit for the six months ended August 23, 2014 by £250 million.
Following the blunder, Tesco hired accounting firm Deloitte to conduct independent investigation, in which it later concluded that its commercial income has been stretched and its costs has been deferred.
In financial year ended Feb 28, 2015 (FY15) Tesco reported a pre-tax loss of £6.376 billion from a pre-tax profit of £2.259 billion in FY14, the biggest loss it has ever recorded in its 96-year history.
Early this year, ratings agencies Moody’s and Standard’s & Poor’s cut Tesco’s credit rating status to junk, amid its plan to turn itself around.
Given dismal performance, Tesco said it still has adequate resources to remain in operation for the foreseeable future, while noting that it will continue its business based on the going-concern basis.
About Tesco Malaysia
Established on November 29, 2001, Tesco Malaysia is a joint-venture between British’s Tesco and Sime Darby Bhd, each of which has stakes of 70% and 30% respectively.
Tesco Malaysia is headed by German-born Datuk Georg Fischer, 40, who previously helmed the German-owned discount supermarket chain Lidl's operations in Belgium.
Currently, Tesco Malaysia operates 54 stores nationwide, as it opened five new stores from 49 stores recorded in 2014. Globally, Tesco’s stores has increased by 512 outlets to 7,817 stores.
In Asia, Tesco operates 2,238 stores, of which 54 stores are located in Malaysia, 425 stores in South Korea and 1,759 stores in Thailand. It also employs 96,471 workers in these three countries.
In Malaysia, Tesco operates in three different formats: hypermarket (5,000 sq m), superstore (3,000 sq m) and express store (1,000 sq m).
Financial performance
In FY14, Tesco Malaysia recorded a flat revenue at RM4.65 billion, while net profit leaped 73% to RM82.2 million from RM47.6 million in FY13.
According to Tesco’s Annual Report 2015, Tesco Malaysia posted a revenue of RM4.54 billion in FY15 on softening sales that declined by 2.9%, owing to a challenging economic environment as well as protests against some Western-owned businesses.
Overall, Tesco Malaysia generated some 8% or £841 million to Tesco’s total sales in Asia in FY15.
Aeon’s acquisition spree
Assuming that Tesco Malaysia will be sold at £900 million to Japan’s Aeon, Tesco is expected to reap 70% or £630 million in cash proceed, while Sime Darby will receive the remaining 30% or £270 million.
It is worth noting Aeon has been aggressive in its acquisition strategy, which is part of its medium-term management plan, as it shifts its focus to the Asian market, in a bid to grow its business outside Japan.
Previously, Aeon had in 2012 completed the acquisition of Carrefour Malaysia Sdn Bhd for €147 million (RM606.41 million).
Too much in Aeon’s plate?
Following the acquisition and subsequent rebranding of Carrefour Malaysia to Aeon Big (M) Sdn Bhd, Aeon’s retail position is further strengthened with 31 Aeon stores and 28 Aeon Big outlets in Malaysia.
Aeon stores in Malaysia are operated by its 51%-owned Aeon Co (M) Bhd. Aeon Big, however, are wholly-owned by Japan’s Aeon.
In total, Aeon has 140 stores in Asean, in different formats such as general merchandise stores, supermarket outlets and hypermarket chains.
Aeon’s profit in Asean has dwindled by 6% in FY15, despite a 15% increase in revenue, as it grappled with sluggish consumer activity toward daily necessities remained weak amid the consumption tax hike and rising prices for goods.
Depending on location and customer profile, Aeon’s store sales growth in Malaysia ranges between 1% and 18%.
At the same time, Aeon is also facing stiff competition with mushrooming convenience stores and other mid-market players such as Econsave. It is also competing against GCH Retail (Malaysia) Sdn Bhd, which operates Giant, Cold Storage, and Guardian pharmacy.
GCH Retail is wholly-owned by Hong Kong-based Dairy Farm International Holdings Ltd.
However, in December last year, Dairy Farm sold its 30% stake in GCH Retail to Syarikat Pesaka Antah Sdn Bhd, a company controlled by Negeri Sembilan royalty, as it seek to comply with regulatory requirement set by the Ministry of Domestic Trade, Co-operatives and Consumerism.
In Malaysia, Dairy Farm currently operates 78 supermarkets, 78 hypermarkets and 426 health and beauty outlets, bringing total number of stores in the country to 582. This is slight more than four times of Aeon’s stores in Asean.
Parting thought
While Tesco’s move to sell its business in Malaysia may help to soften its financial burden, however, will Aeon’s acquisition be accretive to its earnings, given that it already has its plates full with current stores?
Already, it is understood that Japan’s Aeon has yet to fully derive the synergy of its stores in Malaysia.
It does not help too that the rising cost of doing business and economic uncertainties will likely weigh consumers' sentiment, which may reduce purchasing power and affect spending pattern.
Even though Aeon’s store expansion strategy will drive sales growth, the market remain cautious on pressure that is affecting its profit margin.
Indeed, the market will closely monitor Japan’s Aeon expansion plan in Malaysia.
* MaxMonster Analytics reads The Malaysian Insider

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