Britain’s biggest grocer received a double boost this week, as a broker advised investors to buy into Tesco’s “intriguingly cheap” shares and latest industry figures revealed it to be the only one of the multiples to take market share.
Investment Bank UBS reiterated its ‘buy’ recommendation on the supermarket’s shares this week and upgraded earnings forecast. It said the recent share price dip provided a “very attractive entry point” on the shares.
Tesco shares had slid by around 14% since 15-month highs in May, but UBS suggested this sell-off has been overdone based on fears around deflation and the impact of pricing on profits.
The broker argued Tesco’s half-year results on 4 October could shift investor attention away from overblown worries around deflation, and sharpen focus on its recent strong trading momentum.
“We believe Tesco’s momentum and execution in a very rational UK industry points to strong profit growth in the first half,” the UBS note stated. “The first half should pivot investor focus to these upgrades away from the deflation thesis as we believe Tesco remains in a vastly different and much stronger place versus history.”
It raised its full-year forecast for retail adjusted operating profit by nearly 4% to £2.6bn – well ahead of Tesco’s own current guidance – with a price target of 300p.
This thesis was further boosted by market share figures from NIQ on Tuesday, which showed Tesco gaining market share despite slowing sales growth in the sector overall.
NIQ found total till sales value growth at UK supermarkets slowed to 7.2% in the four weeks ending 12 August – the lowest figure since January. That was down to weakening volumes at the grocery multiples, which dropped by 3.8% compared with 3.6% in July.
However, Tesco value sales grew ahead of the market at 9.7%. It gained market share through both new shoppers and an increase in store visits. Aldi (up 22.2%), Lidl (up 16.5%) and M&S (up 11.5%) were the only other retailers who gained market share in this period.
Shore Capital’s Clive Black commented: “Tesco’s Clubcard Prices programme surprised us with its potency and sustainability in truth. The loyalty initiative is helping the UK market leader gain share in recent times, alongside good execution and its price matching activity with Aldi too.”
Tesco shares gained 2.1% over the course of this week to trade at 255p on Thursday. This remains more than 10% down on its May high of 285.3p, but the shares are still up 11.4% year to date.