Tesco 'sitting pretty' amid Sainsbury-Asda merger developments, says Jefferies

In research note sent to clients, the broker characterised Tesco as "sitting pretty" ahead of the CMA's 30 April verdict on the merger, stating that a best case scenario would see the merger allowed to proceed with "very extensive remedies", precipitating a reduction in scale players in the sector from four to three and a curtailment of the merged entity's gross synergies

"But the likely scenario depicted by the CMA's initial findings is also encouraging. As previously discussed, we don't believe that a regulatory stop would prevent a Walmart exit. Sainsburys' need for a recalibration of its equity story would likely add to that development. And investors would inevitably conclude both events describe an even more conducive backdrop to the delivery of the 3.5% to 4% margin target (JEFe 3.54%) for 19/20," the note continued.

The broker also commented that a worse case scenario of the merger being allowed to go ahead with minimal remedies "can pretty much be ruled out", leaving investors to look forward to Tesco's 10 April final results without distraction.

To that end, Jefferies analysts said: "Tesco should confirm a ongoing UK LFL strength, a nice shift in group margins (of 80bps YoY in H2, inc Booker synergies) and a clearly improving FC profile. While we expect a nice hike in the dividend payout (to roughly 35% from 25% a year ago) we remain of the view that exceptional distributions may be a more relevant topic of discussion a year from now."

The note added that some reassurance that Thai margins are set to recover following the 18/19 rebasing was expected, providing investors with strong visibility for 19/20 as another potential year of strong double-digit earnings per share gains, while also reassuring that free cash flow will build beyond the €1.5bn mark in the year ahead.

Tesco's shares were up 0.99% at 228.85p at 1603 GMT.