Investment Column: Tap in to an Asian invasion with Tesco

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Tesco

Our view: Buy

Share price: 421.85p (-4.8p)

Tesco has already gobbled up Britain. Now it's looking to repeat the trick in Asia, and there's a good chance it will pull it off. The group has sought to whet investors' appetites by flying analysts out to the region to show them what it is up to, unveiling some fancy looking targets for the Chinese operations (a plan to quadruple sales in five years) in the process.

The potential of the market is dizzying and over time it ought to become the company's biggest. By 2025, there are expected to be 221 cities with a population of more than a million, against 35 in Europe, cities populated by a fast expanding middle class. To capitalise on this, Tesco is to build hypermarkets in second and third tier-cities in the coastal provinces with 110 open by February 2011. By 2015 it should have 200 hypermarkets in total – less than previously expected, but the sales growth targets are ahead of market expectations.

Who'd bet against Tesco pulling it off? It hasn't been without the odd mis-step along the way, but the group has shown that it is possible for a British retailer to succeed overseas.

And it isn't just China, where like-for-like sales growth of 8.9 per cent over the nine weeks to 31 October suggest the targets are achievable. South Korea (6.7 per cent), Thailand (3.4 per cent) and Malaysia (0.5 per cent) are all ahead. Only Japan (down 5.7 per cent) has disappointed although remedial action is under way.

With profits from Asia soon expected to flow, the attractions of this stock become clear, not least when one considers the valuation. Tesco trades on 13.3 times forecast full year earnings against Sainsbury's on 14.7 and Morrison on 12. The prospective yield of 3.4 per cent compares to Sainsbury's 4.2 per cent and Morrison's 3.6 per cent. But Tesco's growth prospects eclipse these largely domestic plays. It deserves a bigger premium. Buy.

Kier

Our view: Hold

Share price: 1259p (+23p)

Back in May, we put a buy on Kier on the strength of a valuation that was starting to look attractive for the construction, housebuilding and contracting group. The shares have improved by a pleasing 16 per cent since then and yesterday's acquisition news from the group demonstrates some of its attractions. Although relatively modest – with a maximum price tag just shy of £2.5m, plus another £487,000 in the form of a loan repayment – Kier's purchase of renewable energy group Beco is strategically important.

Beco's main focus is on photovoltaic (PV) technology to produce electricity from sunlight. It was one of the first groups to receive government approval as an installer of PV cells and it brings customers across the domestic, business and community sectors. Beco's managing director, Nigel Brunton-Reed, will also move over to join the board of Kier. Given ever-rising power costs, coupled with the growing political focus on green energy generation – not least within the public sector – Beco is well-positioned and the fit with Kier is a rational one, with Beco becoming the delivery arm of Kier's Energy Innovations business.

Chief executive Paul Sheffield says the deal brings the capability to design and deliver PV installations across the UK. At 10.5 times full year earnings the valuation, for a construction group, is no longer as cheap as it was. But we'd still hold the shares.

Diploma

Our view: Buy

Share price: 281.5p (-3p)

Diploma has been involved in numerous industries since its incorporation in 1931, but none in the education sector. After a series of reinventions, it now makes bits of kit for clients in the life science, defence and construction industries. That's been going well.

The group put out a strong set of results yesterday, with adjusted pre-tax profit topping expectations at £32.2m, up 26 per cent. Free cash flow was up from £23.5m in 2009 to £29.8m. Earnings per share rose from 14.8p to 18.9p and the dividend 9p per share up from 7.8p a year earlier.

The seals business, of the hydraulic rather than ocean-going kind, was particularly strong, with revenue up 25 per cent. Headline growth in life sciences, meanwhile, was up 11 per cent.

Panmure puts the stock on a price of 14.8 times 2010 earnings falling to 13.8 times, which looks good value for a growing business. The yield is serviceable at 3.6 per cent, with the payment covered two times over. We backed the stock in March, and it has flown. But there's enough here to suggest there's still fuel in the tank. Buy.