HSBC highlights upside at Tesco, stays at 'buy'

HSBC has reiterated its ‘buy’ recommendation on Tesco, saying that the supermarket group is likely to be the preferred choice of suppliers across the grocery industry.

The bank highlighted that Tesco is the fastest-growing retailer for many suppliers with 2.5% total volume growth.

It is not growing as fast discounters such as Aldi and Lidl “but the sheer size of Tesco means that c2.5% would require Sainsbury to deliver c4.5% to match Tesco (it delivered c2% in 4Q), and Morrisons over 6% (it delivered flattish total volumes in 1Q)”, HSBC said.

“Suppliers face low marginal costs, want volume growth to drive capacity utilisation, and will reward volumes with bigger discounts. Tesco’s momentum is starting to build and we expect it increasingly to win more of its suppliers’ discretionary support and investment,” the bank expalined.

HSBC also said that a rights issue at Tesco “looks increasingly unlikely” and highlighted potentially attractive prices for the upcoming sales of its Dunnhumby and Korean businesses.

The bank’s 295p target price for Tesco offers 31.9% potential upside to current prices, “but long-term potential could be higher”, it said.

The stock was down 2.2% at 214p by 11:03.