UBS backs Tesco as retailer makes 'significant headway' in turnaround

UBS has upped its price target on Tesco, arguing that the supermarket chain is “fundamentally stronger" and that the market's ongoing scepticism is misplaced.

In a note published ahead of Tesco’s capital markets day next week, when the retailer will update investors and analysts on its strategy, UBS increased its price target to 315p from 305p while sticking to its 'buy' recommendation for the shares.

The investment bank said the market was “inherently sceptical” about Tesco, with the share price little changed year-on-year. But it said the retailer was now “a fundamentally stronger business” and had made “significant headway in what is a broad-based and sustainable recovery”.

It continued: “Consistent margin rebuild in its UK business and like-for-like growth outperformance reflects genuine reconnection with shoppers and superior terms of trade that culminates from innovative approaches with suppliers.”

The bank also pointed to “untapped value opportunities” which it expected management to detail at the upcoming capital markets day. UBS sees growth potential in the UK and Asia in particular, with the former benefiting from the Booker acquisition in the “higher margin foodservice channel, with superior terms of trade and better fresh/private label supply chain”. Tesco acquired wholesaler Booker in 2018 for £3.7bn.

Looking ahead to Tesco’s update on first-quarter trading, which is scheduled for Thursday, UBS is predicting like-for-like UK sales growth of 0.7% and 4.5% for Booker. Underlying sales in Central Europe are likely to be down 1.5%, UBS said, “hampered by ongoing drag from Sunday trading law and [general merchandise] rationalisation. We model Asia like-for-likes of -0.5%, as the Thai business begins to cycle through headwinds from last year and is now supported by more favourable inflation.”

Shares in Tesco, the UK's largest supermarket chain, were largely flat by 1300 BST, off by a little under 1% at 228.6p.