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A-rated Brazier buys Tesco for first time in six years
by Danielle Levy on May 02, 2012 at 00:01
His stance is in marked contrast to that of Invesco Perpetual's Neil Woodford, who until recently had held the stock across his portfolios, which include the Citywire Selection Invesco Perpetual High Income and Invesco Perpetual Income funds, for around 20 years. Fellow Selection manager, Nigel Thomas of AXA Framlington, has also recently sold out of Tesco through his AXA Framlington UK Select Opportunities fund.
Brazier, who is Threadneedle’s UK equity head, initiated the position in the wake of the supermarket’s profit warning earlier this year, taking advantage of share price weakness, and believes its ability to generate cash has been underestimated by the market.
‘Tesco should be able to generate quite a lot of cash over the next five years and its debt should come down quite quickly,’ he said. ‘No-one seems to be talking about it because they are worried about the UK margin. People forget this is a cash-generative business.’
This is far more upbeat than Woodford's prognosis who last month said: 'Tesco's problems are, in my opinion, not just down to the difficult consumer environment. With the benefit of hindsight it has become clearer to me that some of the company's investment decisions in recent years have not created the value they should have.'
However, Brazier argues that at nine times next year’s earnings and yielding just under 5%, the stock is attractively valued. His comments come in the wake of the retailer’s full year numbers in which it posted a 5.3% rise in pre-tax profit to £3.8 billion, and announced plans to spend £1 billion in a bid to maintain dominance in the UK.
In terms of other stocks he is backing, Brazier said his fund has made about 35% from its position in EasyJet, having invested in the low cost airline in June and July of last year. ‘It is an interesting company, which can still grow in a low growth world,’ he said.
Over the three years to the end of March, his Threadneedle UK fund has returned 73%, while the FTSE All Share is up 67.9%, according to Lipper.
Looking ahead and in the wake of the recent market rally, Brazier expects that companies with strong franchises, good barriers to entry and unique assets will offer upside. He has been adding to stocks such as Unilever and Experian as a result.
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