Tesco slides as Deutsche Bank downgrades to 'hold'

Tesco was under pressure on Tuesday after Deutsche Bank downgraded its stance on the stock to ‘hold’ from ‘buy’ with an unchanged price target of 210p.

The bank noted Tesco is due to report full year results on 13 April and said that after joining in September 2014, this represents chief executive Dave Lewis' first full year.

“It’s been volatile from a share price perspective, as enthusiasm for the new management and the potential deleveraging impact from asset sales collided with the reality of earnings downgrades, an aborted sale process for Dunnhumby and earnings and cash flow dilution from the South Korea disposal,” DB said.

It continues to expect the best relative EBIT margin development at Tesco versus its UK peers, mostly on the back of commercial gross margin gains and cost cutting.

However, the bank pointed out the shares are up 35% in the past three months.

Deutsche said the new management team has made some real progress, but pressures remain.

It argued that the pension deficit funding agreement and the disposal of South Korea has alleviated concerns on Tesco’s balance sheet.

“While leverage remains high, liquidity is strong and the debate about a potential rights issue has largely disappeared,” DB said.

In addition, the closure of 43 unprofitable stores, and of Cheshunt headquarters and relocation to Welwyn Garden City is one of a number of ways management is creating a ‘new’ Tesco and driving around £400m of cost savings.

At 0905 BST, Tesco shares were down 2.1% to 186.95p.