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Tesco slips on talk of a new price offensive, as it floats off Thai properties

Tesco has found itself in the news with a number of initiatives, announced and rumoured.

Firstly there is talk of a new price offensive, which analysts said would hit anyone doing a Tesco price match and perhaps Ocado in particular. Over to Philip Dorgan at Panmure Gordon (a noteable bear of Ocado):

It looks like the sector’s ‘big dirty secret’ is about to reveal itself. Market gossip suggests that Tesco is set to launch a significant price offensive next week. This is generally not the signal for sector price outperformance, but we believe that Tesco will be proportionate and it will retain its return on capital targets, which would be a significant signal that it expects to derive medium term benefits for shareholders and that the other levers for higher returns, such as the US, are moving in the right direction. We retain our buy recommendation and target price of 500p.

Ocado is playing with the big boys now. Unfortunately, scale is a big advantage in food retailing, so we expect Tesco’s planned price initiative to hurt Ocado disproportionately. We therefore now expect Ocado to lose money for at least the next two years. We therefore reiterate our sell recommendation and 50p price target.

On the prospect of a price war, Kate Calvert at Seymour Pierce said:

Pricing activity is expected to ‘hot up’ this week end with talk in the market that Tesco will be launching a new campaign in-store. The autumn is traditionally a very competitive time for the food retail sector and the reduction in promotional activity in August seemed to suggest that the industry was building up fire power. We have a buy recommendation as we believe Tesco is well positioned to benefit from the pick up in the global economy, though the UK business is likely to continue to hold back sentiment until there is clearer evidence that the business is back performing at least in-line with its peers.

Elsewhere there was a report Tesco Bank was delaying the launch of mortgages, due in the autumn, until early 2012 because it has apparently yet to receive regulatory approval.

Meanwhile Tesco Lotus in Thailand has announced the launch of a property fund, to be listed in the country at a value of perhaps £300m.

Espirito Santo said:

The fund will be structured in a similar way to a REIT, and we understand that Tesco could retain a stake of up to a third although no firm decision on this issue has been made. The statement indicates that the proceeds will be used to invest in the business, so this does not indicate a return to cash going directly back to shareholder funded by property transactions (as was the case with the 2007-09 share buyback). What makes this announcement different is firstly that the property will be listed (giving more transparency to the value of Tesco’s property) and secondly that it involves property in the international business; in the past the bulk of property transactions have come from the UK estate. As a result, we may be starting to see Tesco taking a more pragmatic and innovative approach to its £36bn property portfolio. That said, there seems to be no material shift in strategy here as sale and leaseback transactions have been used to fund the business for some time, and we expect this to continue.

Tesco is down 2.95p at 368.2p, Ocado has lost 3.2p to 112.5p, J Sainsbury is off 1.4p at 279.6p and Morrisons has fallen 2.8p to 292.4p. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds