ShoreCap reiterates 'hold' on Tesco after first half interims

Shore Capital reiterated a ‘hold’ rating and target price of 189p on Tesco on Wednesday after the supermarket reported its first half results.

The company reported group sales grew 3.3% to £24.4bn and UK like-for-like sales improved to a 0.6% increase from the 0.3% rise the same period a year earlier. However, its pension deficit soared to a whopping £5.9bn from £3.2bn, reflecting lower bond yields.

Chief executive Dave Lewis also laid out his ambitious plans for growing profit margins. Lewis aims to lift group operating margin from its current 2.2% to 3.5-4.0% by the 2019/20 financial year, helped by cost cutting and a solid level of capital expenditure.

“The results themselves represent demonstrable operational improvement from the business with cash sales and not just volumes now positive in the UK in particular alongside much needed margin accretion. We welcome this progress,” said ShoreCap.

“However, the operations in isolation do not characterise the Tesco investment thesis. The burden of broad level indebtedness and the corresponding high solvency ratios, continue to prevent us from taking a more positive view on the group's shares.”

Shorecap said it may upgrade its current pre-tax profit forecast for fiscal year 2017 of £682m. Further out, the broker predicts an earnings before interest and tax margin of 3.7% in 2020.

“Indeed, whilst there may be some understandable excitement today on Tesco’s new margin ambitions and the greater confidence of management, it is important to point out the back-end weighted nature of the plan, wholly consistent with our understanding of the business and investment thesis on the stock.”

Shares in Tesco jumped 11.47% to 210.40p at 1111 BST.