HSBC expects Tesco's fine will draw line under accounting scandal

Following Tesco agreeing to pay a £129m fine over its accounting scandal, HSBC has reiterated its ‘buy’ rating and 260p target price.

The bank believes that while the supermarket’s recovery continues it is still a long-term winner as the fine to be paid to the Serious Fraud Office will bring the accounting controversy to a close and that it also remains positive about its proposed merger with Booker.

Tesco reached a deferred prosecution agreement with SFO after a two-year investigation and the penalty should draw a line under the scandal, HSBC said.

In addition to the £129m fine to the SFO, Tesco will pay about £85m compensation to certain shareholders, incurring a £235m exceptional charge on its 2017 balance sheet.

It will not pay a penalty to the Financial Conduct Authority, but has agreed to find market abuse relating to a trading statement on 29 August 2014.

HSBC is also positive about its proposed £3.7bn takeover over of food wholesaler Booker, despite Schroders, the supermarket’s third-biggest shareholder, and Artisan Partners, who together hold a 9% stake in Tesco, voicing their concerns about the deal to the Financial Times.

The bank said that the takeover could “see significant synergies unlocked, see Tesco’s underutilised asset base better used and would create a platform well placed to benefit from industry changes.

Tesco remains an “attractive recovery story based on scale advantages, volume growth and margin recovery” to HSBC, and it expects its full-year results to be positive.

Long term, a return to a circa 4% margin in the UK is “logical” given underlying industry economics and Tesco should be able to earn a premium on the industry average.

A 4% margin is well ahead of the 1.7% delivered last year and if it achieves this, Tesco will “become a highly cash-generative market leader and should be able to eliminate any lingering balance sheet concerns”.

Shares in Tesco were up 0.13% to 191.45p at 0853 BST.