SocGen downgrades Tesco, sees scope for de-rating

Societe Generale downgraded Tesco to ‘sell’ from ‘hold’ and cut the price target to 150p from 180p following the company’s full year results.

It said management’s cautious guidance for 2016-17 showed additional heavy investments are required in the UK. Despite the improved top-line momentum, the margin recovery will likely take time and last longer than the three years it took French peer Carrefour, SocGen said.

The French bank also highlighted growing concerns over the entry of Amazon into fresh online. “Tesco is the leading online UK player and is the most at risk.”

SocGen said it was more cautious on the medium-term UK margin recovery and pointed to a still stretched balance sheet.

“Assuming no dividend and capex of around £1.3bn (which means no expansion), we see the company reducing net debt by just £600-700m per annum over the coming three years.”

In addition, the bank said there was scope for a de-rating and recommended switching into buy-rated into Carrefour.

At 0946 BST, Tesco shares were up 1.2% to 183.20p.