Broker tips: Tesco, Ted Baker

UBS has upped its price target on Tesco, arguing that the supermarket chain is “fundamentally stronger" and that the market's ongoing scepticism is misplaced.

In a note published ahead of Tesco’s capital markets day next week, when the retailer will update investors and analysts on its strategy, UBS increased its price target to 315p from 305p while sticking to its 'buy' recommendation for the shares.

The investment bank said the market was “inherently sceptical” about Tesco, with the share price little changed year-on-year. But it said the retailer was now "a fundamentally stronger business" and had made "significant headway in what is a broad-based and sustainable recovery".

It continued: "Consistent margin rebuild in its UK business and like-for-like growth outperformance reflects genuine reconnection with shoppers and superior terms of trade that culminates from innovative approaches with suppliers."

The bank also pointed to "untapped value opportunities" which it expected management to detail at the upcoming capital markets day. UBS sees growth potential in the UK and Asia in particular, with the former benefiting from the Booker acquisition in the "higher margin foodservice channel, with superior terms of trade and better fresh/private label supply chain". Tesco acquired wholesaler Booker in 2018 for £3.7bn.

Looking ahead to Tesco's update on first-quarter trading, which is scheduled for Thursday, UBS is predicting like-for-like UK sales growth of 0.7% and 4.5% for Booker. Underlying sales in Central Europe are likely to be down 1.5%, UBS said, “hampered by ongoing drag from Sunday trading law and [general merchandise] rationalisation. We model Asia like-for-likes of -0.5%, as the Thai business begins to cycle through headwinds from last year and is now supported by more favourable inflation.”

Analysts at Liberum slashed their target price on menswear retailer Ted Baker to 1,280p from 2,300p previously after the group issued a profit warning a day earlier.

Ted Baker cautioned on Monday that it now expected full-year underlying pre-tax profits to be at least £10m lower than its own forecasts of £70m, with management setting a new range of £50m - £60m as a result of "extremely difficult trading conditions".

Liberum, which maintained its 'buy' rating on the group, highlighted "a mixture of market conditions and internal issues" as having led to a 30% cut to its own forecasts for pre-tax profits.

The analysts believed the short-term and identifiable issues around product were being addressed swiftly by Ted Baker's management but remained cautious, saying the unpredictable trading backdrop across all markets appeared to have "less end in sight".

"The management are doing what they can targeting the cost base as well as launching a number of initiatives such as faster speed to market, monthly drops and ship from shop. These will be incrementally positive in H2, but heightened promotional activity looks set to remain for some time," said Liberum.

Liberum also pointed out that comparatives were easier in the second half than the first so while its new forecasts did not account for any recovery in the tail end of the year, the initiatives and swift action by management "should at least steady trading" if not see a modest uptick.

The broker now expected Ted Baker to deliver sales of roughly £619.2m, gross profits of £353.9m and underlying earnings of £84.3m in 2020 - down 1.9%, 5.4% and 19% on its pre-warning estimates, respectively.