CSS Partners FTSE350 Market Report

Market Report

13 October 2008

Tesco PLC
TSCO.L

Sector	Personal goods
Last closing price (13/10/2008) (p)	356.4
52 week High/Low (p)	494.25/330
Market Cap (£bn)	28.81
Sector weight age by Market Cap (%)	70.659
Average Volume (mn)	55.19
P/E ratio (TTM)	13.05
Industry P/E ration (TTM)	1286.69

TTM: Trailing Twelve Month

Daily chart (TSCO.L)

Business background and investment rationale

Tesco PLC is one of the world’s leading international retailers. The group’s principal activity is food retail, with over 2,000 stores worldwide. Tesco has a long term strategy for growth, based on four key parts: growth in the core UK business; international expansion; to be as strong in non-food as in food retail; and to follow customers into new retailing services.

Expansion in international business

To minimise the risk from the UK market, Tesco is expanding internationally with the acquisition of 36 Homever stores in South Korea from the E-Land Group. The deal will provide Tesco with the equivalent of three years’ organic expansion and means a reduction in future store development in areas where Homever stores currently trade. Tesco has also entered the Indian market with a plan to develop a wholesale cash & carry business, based in Mumbai, offering a comprehensive range of great value fresh food, grocery and non-food products to small retailers, restaurants, kirana stores and other business owners. At the same time, the group also entered into a fee-based franchise agreement with Trent, the retail arm of the Tata Group, to provide expertise and technical support to Star Bazaar, its hypermarket business. Star Bazaar will also be a customer of the cash & carry business. The company also purchased a 50% shareholding of Tesco personal finance from Royal Bank of Scotland which could deliver £1bn in profits per annum, a significant increase from current profits of £400m.

Introduction of discount brands and operational improvement

Given the household budget pressures thanks to the current financial turmoil, Tesco introduced 400 discounted brands covering most grocery categories. The new range is higher in price and quality than Tesco Value, and will match discounted ranges in addition to 550 other products which are price-matched. Tesco’s introduction of self checkouts are reducing queues through the use of improved technology including faster, more accurate scanners and checkout cameras which continually track queue lengths.

Technical outlook

On daily chart Tesco is trading near 52 week low of 330.0p and fallen more than 21% last week with high volatility. On technical MACD and 14 day RSI looks near to oversold with MACD negative and RSI near 30.0. Stochastic also show oversold with DMI showing strong negative trend. Stock has good support between 324.0p and 330.0p and resistance at 364.0p and 387.0p level.

Trading strategy

The stock can be bought around 342.0p with a profit target 381.43p and stop loss of 324.85p (Hedge position: short position in spread betting with £3.652 bet per point).

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British American Tobacco
BATS.L

Sector	Tobacco
Last closing price (13/10/2008) (p)	1571
52 week High/Low (p)	2060/1350
Market Cap (£bn)	32.21
Sector weight age by Market Cap (%)	66.63
Average Volume (mn)	8.9
P/E ratio (TTM)	14.13
Industry P/E ration (TTM)	0.13

TTM: Trailing Twelve Month

Daily chart (BATS.L)

Business background and investment rationale

British American Tobacco PLC is an international tobacco company engaged in the sale of cigarettes, cigars, leaf and other tobacco products. It has over 300 brands in its portfolio which are sold in more than 180 markets. There is a particular focus on its four Global Drive Brands (GDB): Dunhill, Kent, Lucky Strike and Pall Mall.

Strong growth in emerging markets

In an interim result for the first six months, BATS reported 15% higher revenue at £5,457m thanks to a combination of favourable exchange rate movements, improved pricing and a better product mix. In Asia-Pacific, profits rose by £68m to £403m, mainly attributable to strong performance in Pakistan, Vietnam, Bangladesh, Australia and Malaysia, as well as benefiting from favourable exchange rates. The group’s associate in India, ITC, continued its strong profit growth; its contribution rose by £10m to £64m. At constant rates of exchange, the contribution would have been 13% higher than last year. In Europe, profits were up £126m hitting £530m, mainly as a result of excellent performances in Russia and Romania.

Significant acquisition in emerging market

In February 2008, BATS won the public tender for Tekel, the Turkish state owned Tobacco Company, with a bid of US$1,720m. The acquisition will raise the company’s share in the Turkish market, which is the eighth largest cigarette market in the world, to some 36% from just over 7%. The company also announced an agreement to acquire 100% of Skandinavisk Tobakskompagni’s (ST) cigarette and snus (moist powder tobacco) business. ST accounts for more than 60% of cigarette sales in Scandinavia, allowing BATS to strengthen its market positions in Denmark, Norway, Sweden and Poland, and achieve significant synergy benefits after acquisition.

Technical outlook

On daily chart, stock has fallen more than 30 % in last week making a 52 week low of 1350 today. MACD is at historical low and 14-day RSI is below 30.0 indicating oversold.14 day -DMI is way above 14-day +DMI indicating strong downside with high volatility. Stock has good support near 1406.0p and strong resistance at 1683p and 1800.0p levels.

Trading strategy

The stock can be bought around 1500.0p with a profit target 1672.95p and stop loss of 1424.8p (Hedge position: Short position in spread betting with £0.832 bet per point).

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This report has been issued by CSS Partners LLP (“CSS Partners”). CSS Partners is an appointed representative of Charles Street Securities Europe LLP (“CSS”) which is authorised and regulated by the Financial Services Authority in the UK. It constitutes non-independent “investment research” as contemplated by the FSA Rules and is thus considered a marketing communication. This report was prepared by Kuldeep Bhati who is employed as an analyst at CSS Partners and as such does not conform with the FSA definition of independent investment research and as such is not subject to the rule of not dealing ahead of distribution of the marketing communication and was not prepared in line with the legal requirements for independent communication.

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Risk Factors

There is no certainty that the recommendations will be successful or that they will make money for investors.

There is no certainty that execution prices can be achieved, either in opening or in closing a position.

There is considerable risk operating in equity, futures, options and spread betting markets and investors need to be able to sustain a total loss of capital along with unlimited liability. Potential investors are recommended to consult a financial adviser before entering into such positions.

Regulatory disclosures

In accordance with the Conduct of Business Rules COBS12.4.7R (i) in the preparation of the report the analyst used price and volume charts provided by independent data suppliers and applied technical analysis tools of investment and trading evaluation in arriving at his recommendations, ii) all recommendations made by the analyst are followed up in subsequent reports until the closure of a position, iii) there is no certainty that any recommendation will be successful or that technical analysis should be used exclusively to arrive at investment decisions.

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Distribution of recommendations for the period 1 July to 30 September 2008:

% Distribution of recommendations No of recommendation

Buy 60.8% 17

Hold 0 0

Sell 39.2% 11

The first column displays the % distribution of recommendations made by CSS Partners in this Technical Analysis Trading programme and the second column shows the numbers of such recommendation. Neither CSS nor CSS Partners has any investment banking relationships with any of the companies covered in the Technical Analysis Trading Programme, namely the companies in the FTSE 350 index.

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	% Distribution of recommendations	No of recommendation
Buy	60.8%	17
Hold	0	0
Sell	39.2%	11