ShoreCap stays at buy on Tesco, eyes possible multiple expansion

In his judgement, the company's equity story had been a "dull" one of late in comparison to the bid-infused atmosphere in its sector and on the wider FTSE 100.

"The business has been between a bit of a rock and a hard place, not seen as likely to be a bid target and not yet in a position, due to the fragility and uncertainty engendered by the pandemic, to set out a clear and convincing narrative for the market to follow," he explained.

Nonetheless, he said the group had executed "very well", particularly in both UK retail and wholesale, "which is a strong platform to have greater confidence in the ability of Tesco to be a cash compounder."

The key, Black said, was for the grocer to improve visibility around its operating cash flows and earnings and while he could not 100% rule out M&A, bolt-on work was a possibility.

On the back of the latter, he anticipated ongoing buybacks and/or "special distributions reflective of the prevailing share price multiples".

He also pointed out how the share buyback announced by the company on Wednesday was better than he had expected.

And while mid-single digit earnings per share growth was not "go-to growth" could be enough, when combined with share buybacks, its dividend cover and dividend yield for total shareholder returns of about 13-16% "which with delivery would expand the Group's PER in our view".