Tesco is a cash compounder, Shore Capital says

Tesco is a cash compounder that values capital discipline over growth after selling its Chinese stake and other overseas interests, Shore Capital said.

Reiterating its 'buy' rating on Tesco, Shore said the sale of the retailer's 20% stake in Gain Land to joint venture partner China Resources Holdings for £275m is a further step in Tesco's retreat from global ambitions. Tesco is also in talks to sell its operations in Malaysia and Thailand and would listen to offers for its Polish business, Shore said.

Thailand is Tesco's biggest growth prospect and should be sold for a price that fits that profile, Shore said. Generally Chief Executive Dave Lewis's reversal of foreign expansion to concentrate on the UK and Ireland has been welcome, the broker said. Shore kept its 249p target price on Tesco shares.

"Tesco is now a very much more focused organisation, one with considerably more constrained geographic and growth aspirations than prior regimes," Shore analyst Clive Black wrote. "That strategy has delivered, however, a capital disciplined organisation where we see scope for ongoing robust cash generation, indeed we now see Tesco as a cash compounder."

The strategy can achieve steady earning growth, a dividend paid from free cash flows in line with earnings growth, complementary acquisitions and capital returns to shareholders, Black said. When Ken Murphy replaces Lewis in October he will have less corporate travelling to do than his expansionist predecessors, Black said.

"With the group operating in a mature UK grocery market in particular, we see such a strategy as rational and one that we support," Black said.