ShoreCap upgrades Tesco to 'buy', spies return to dividend payouts

Analysts at ShoreCap upgraded their recommendation for shares of Tesco from 'hold' to 'buy' following what they termed a "robust" first quarter trading update from the grocer.

Feeding that momentum were the shift from out-of-home to in-home calorie consumption, although the update did also confirm a "significant" step up in costs linked to the Covid-19 pandemic which would be weighted towards the first half.

Nevertheless, greater clarity from management on its expectations for profits in the full 2021 financial year allowed ShoreCap to reintroduce forecasts for Tesco.

Management guided towards a flat year in Retail and book losses in the banking side of the business of £175-200m.

On the back of that, the analysts penciled-in estimates for an 11% drop in earnings per share for the current year, but a subsequent rebound during the next followed by further growth thereafter.

They also spied a return to dividend payments and share buybacks.

"Tesco’s cash flow credentials are also clearly to the fore, and with leverage targets soon to be met we see scope for all of the double-digit postcapex FCF yield to be returned to shareholders on an annual basis, through dividend

and buy-back activity," they said.

The shares' valuation was "undemanding" in their view, what with an estimated price-to-earnings multiple of 10.5 times for FY 2022 and trading on an enterprise value-to-earnings before interest, taxes, depreciation and amortisation multiple of 6.5.

Hence their decision to upgrade their recommendation from 'hold to 'buy'.