Tesco’s shares continued to recover ground on Friday on hopes that things are improving after the supermarket’s recent torrid time, as retailers head into the key Christmas period.
The accounting scandal which saw a £263m black hole in its profits, along with the increasingly competitive market where discounters like Aldi and Lidl are gaining ground, have combined to put Tesco under enormous pressure.
But analyst Bruno Monteyne at Bernstein continued his positive outlook on the business, forecasting that Tesco’s market share slide could be slowing:
Ahead of Kantar’s next results, released on Tuesday 18th November, we preview the results using our proprietary GoogleTrends model. This is the last update before we enter the Christmas battleground (the last couple of weeks have seen the release of every company’s blockbuster Christmas adverts). This update therefore will tell us who is taking momentum into this key period.
We forecast Tesco will lose 110 basis points of market share year-on-year. On face value this is not ideal, but it represents a substantial slowdown from the 150 basis points of market share losses as recently as August and shows some trend in the right direction. This is especially positive because the comparison is harder this month that it was in the previous. Although no clear new strategy has yet been announced by the new Tesco management team, it is clear some of the small steps they have been taking are steps in the right direction. This should alleviate some concerns of a potentially disastrous Christmas period.
Meanwhile David McCarthy at HSBC raised his recommendation from neutral to overweight and his price target from 195p to 240p. He said a full turnaround could take five to ten years, but the right steps were being taken:
We believe the short term risk to Tesco shares is on the upside. The interims removed several concerns (e.g. the extent of accounting issues), allowed a first view, to many, of the new chief executive Dave Lewis and chief financial officer Alan Stewart (they impressed) and saw several positive actions (e.g. cost cutting initiatives). On the overtly positive, more was said on the new strategy than first appears (e.g. it seems cost savings will be invested into prices); the strategy makes sense to us and we believe steps are being taken, in-store, to improve the offer (bigger wage, wastage and cleaning budgets).
Many challenges remain (managing the profit and loss and balance sheet, and dealing with “structural issues”) but we believe in the short and immediate term the market will anticipate recovery before it happens. The market is also likely to price in a recovery short term, even if it does not happen. We believe we have seen enough to upgrade..
All great retail turnarounds return to a company’s heritage - and we see elements of Tesco’s “better, simpler, cheaper” heritage coming through.
We can see a strategy that will allow Tesco to regain the initiative in the industry. Structural issues can be managed and the discounters are not unbeatable.
Tesco closed 3.85p higher at 195p while rival J Sainsbury rose 5p to 270.1p as it successfully priced a £450m convertible bond.
Overall the FTSE 100 finished 18.92 points higher at 6654.37, helped by better than expected growth figures from France and Germany, and positive US retail sales and confidence reports. On the week the index added 87 points.
Aggreko added 52p to £15.94 after a well received update from the temporary power supply company.
But commodity companies continued to weigh on the market, with the recent weakness in oil and falling metals prices. Anglo American slipped 6p to £13.55 while Rio Tinto dipped 4.5p to £30.40.
SABMiller fell back after Thursday’s figures, down 60.5p to 3494.5p. Investec analyst Anthony Geard said:
SAB’s interims fell short of expectations primarily due to sharply lower profitability in Asia, notably Australia. While we keep our below-consensus estimates intact courtesy of lower tax and interest rate guidance, the valuation still looks stretched to us in a low-growth world where competition is hotting up. In this regard, the arrival of a well-armed new entrant in SAB’s most profitable market, Colombia, [a joint venture between Colombia’s Postobón and Chile’s Cervecerías Unidas] looks threatening. We stay sellers.
SAB’s elevated rating is high relative to its own history and it enjoys an extended (14%) premium to the consumer staples peer group on a forward basis. Its resilient performance despite increased emerging market risk aversion in recent months suggests that there is still a meaningful bid premium in the share price.
Lower down the market Hunting dipped 0.5p to 690p after a sell note from Liberum, which said:
Baker Hughes confirmed that it has engaged in preliminary discussions with Halliburton regarding a potential business combination transaction. These discussions may or may not lead to any transaction. Combined, the companies would notably dominate significantly the US onshore fracking market. A combination would have various impacts on the entire industry. In our coverage, Hunting looks the most exposed at first sight, although Halliburton and Baker Hughes are customers rather than competitors.
Finally Salamander Energy soared 21% to 117p after the oil and gas explorer said it had received a takeover approach from a consortium led by Spain’s Compania Espanola de Petroleos and Jynwel Capital.
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