* Tesco shares trade at discount to most major rivals
* Has lost some share in mature UK grocery market
* Discount brands may be helping firm retain UK customers
* International, financial services offer growth platforms
By Mark Potter
LONDON, April 21 (Reuters) - The jury may be out on Tesco's new discount brands range, but prospects for growth abroad and in financial services and telecoms mean shares in the world's No.3 retailer shouldn't trade at a discount to peers.
Tesco's stock is priced at about 11 times forecast earnings for 2009-10, below world No.1 Wal-Mart on 14.2 and No.2 Carrefour on 11.8, as well as UK rivals J Sainsbury and Morrison , according to Reuters data.
Much of this is due to signs that Tesco is losing ground to competitors in Britain, which accounts for about 70 percent of the group's sales and three-quarters of trading profits.
But the group is still holding onto most of its big market share gains of recent years and, while this is the case, investors should look beyond Britain's maturing grocery market and focus on its prospects for UK growth in banking, telecoms and home shopping, as well as huge markets like China and India.
"Ultimately, would investors prefer exposure to structural as well as operational growth opportunities, or 100 percent exposure to a UK grocery market that structurally, aside from small capacity withdrawal, is not growing?" Nomura analyst Matthew Truman asked in a recent research note, questioning whether Tesco should trade at a discount to UK-only rivals.
Tesco, which employs 440,000 people in about 4,000 stores across 14 countries, posted a 10 percent rise in annual profit to 3.13 billion pounds ($4.5 billion) on Tuesday.
Sales at UK stores open at least a year were up 3.4 percent in the first six weeks of its new financial year. That's an improvement on the 2.7 percent reported in the fourth quarter, but it still lags rivals like Sainsbury, which posted a 6.2 percent rise on the same basis for the 11 weeks to March 21.
Some analysts are worried Tesco, which has about 30 percent of the UK grocery market, could experience a prolonged period of share price underperformance, as occurred to Carrefour when it was losing ground in its main French market.
"Our core belief is that the market will not fully embrace the Tesco story again until it has stabilised its UK market share performance," Citigroup analysts wrote recently.
RISKS VS POTENTIAL
But others are more relaxed, arguing Tesco is naturally ceding a little of its big market share gains of recent years as previously underperforming rivals raise their game.
"Put simply, many customers who had been driving past a Sainsbury/Morrisons supermarket to get to a Tesco no longer see the need to," Morgan Stanley analysts explain.
Tesco launched a new range of discount brands in September in a bid to give it renewed impetus and while the jury is still out whether it will eventually help the group to regain market share, some analysts think it has done enough to retain custom.
For RBS analyst Justin Scarborough, that is crucial.
"If it had not introduced the discounter brands, then its platform to offer other products, whether they be non-food, or telecoms, or financial services, would have been significantly diluted," he said.
As it is, Tesco has a customer base of over 20 million Britons a week to try to sell new products to, whether insurance or mobile phones, at little extra infrastructure cost -- a "huge opportunity", according to the Citigroup analysts.
Tesco said last month it planned to open 30 bank branches in its stores this year, and said on Sunday it aimed to double its number of in-store phone shops to 100 by next March.
Outside the UK, Tesco has expanded into some of the world's biggest potential growth markets, like China and India.
This has not been without problems or come without risks.
For example, with a strong presence in Ireland, Hungary and Thailand, Tesco is current exposed to some of the economies worst affected by the global economic downturn.
Trying to crack major foreign markets is also expensive and there is no guarantee of success, as Tesco has found in the United States, where the group has abandoned forecasting when its Fresh & Easy chain will break even because of the recession.
"There is a very real risk that Tesco could destroy a great deal of shareholder value in trying," Morgan Stanley analysts warn.
But of all the major international retailers, Tesco has the best track record on foreign expansion so far, only having withdrawn from one market, Taiwan, and then at a profit.
Bank of America-Merrill Lynch analyst John Kershaw also sees a clear path for growth over the next few years with last year's purchase of stores in South Korea already yielding good results and financial services offering relatively low risk rewards.
"International and Tesco Personal Finance are now becoming of sufficient scale to keep Tesco Group as a 10-percent-plus EBIT (earnings before interest and tax) grower in the medium term, a prospect not reflected in the shares," he said. ($1=.6896 Pound) (Editing by Jon Loades-Carter)