Tesco’s share price slumped 2% yesterday after it announced falling sales in the first quarter, prompting dismissal of the retailer as a ‘sinking ship’.
‘Tesco has significant problems, which the market is well aware of,’ Mundy (pictured) acknowledged.
In particular, Mundy highlighted Tesco’s troubled international expansion and its focus on maintaining a 6% margin.
‘They got a bit full of themselves,’ Mundy said. ‘I think the UK consumer sussed them out.’
Despite these problems, Mundy felt investors were overlooking Tesco’s core strengths.
‘Let’s imagine they were a Belgian widget maker,’ Mundy suggested: the firm enjoys an industry-leading 30% market share, high margins, and is ‘nasty’ to suppliers to keep costs low.
Mundy added that ‘there is a very good chance we’re going to get management change’ at Tesco in the near future, bolstering a turnaround investment case.
He also doubted the consensus that Tesco’s business was being squeezed into irrelevance by discount chains below it and upmarket stores above it.
‘Everybody is an expert on Lidl, Aldi and Waitrose,’ Mundy remarked, observing too that Aldi and Lidl did not offer ‘the greatest shopping experience’.
Of the discounters, he summarised: ‘The own-label dishwasher tablets are fine. The own-label Shreddies are horrible.’
Mundy supposed Tesco could equally challenge the likes of Aldi and Lidl on price rather than conceding the value space. ‘They must be able to source food cheaper than them,’ he contended.
Mundy now owns Tesco in both his £1.2 billion Investec UK Special Situations fund, through which he has a £35 million stake in the supermarket, and the £906 million Temple Bar Investment Trust, in which Tesco has been his most-bought stock over the past three months.
He rejected fears that he had been buying into Tesco’s recovery too early: ‘I think it would be wrong not to have a position already.’
Mundy has backed Morrisons as well, despite its recent sales performance being ‘so outstandingly bad’ relative to its peers.
He speculated that Morrisons also faced imminent management change, given that its strategy had focused too much on rolling out extras like in-store bakeries rather than ‘getting enough Granny Smiths on the shelves’.
However, Mundy cautioned against viewing Morrisons as a property play, with value to be extracted by selling off its land.
For Mundy, the only viable alternative use of the property would be residential, which was unlikely to secure a substantial uplift in value.
‘The downside is significant if you think it is an asset play,’ he warned.
Mundy’s UK Special Situations fund has returned 38.4% over the past three years, and Temple Bar 49.3% on a net asset value basis, while the FTSE All Share index has generated 33% through the same period.