Jefferies stays at 'buy' on Tesco in anticipation of stronger UK economy

Analysts at Jefferies reiterated their 'buy' recommendation and 310.0p target price for shares of Tesco in anticipation of an upbeat third quarter trading update and for over Christmas from the grocer, the possibility of quick progress on disposing of its Asian assets and a greater willingness on the part of investors to engage with UK assets thanks to a "better-managed" Brexit process in 2020.

The broker forecast declines in the grocer's like-for-likes over the third quarter and Christmas of 0.8% and 0.5%, respectively, in part due to the sales-dilutive impact of "accelerated restructuring" in the group's operations in Central Europe.

LFLs in Central Europe were seen down by about 5.0% as stores were aggressively downsized.

Meanwhile, the rate of increase in earnings per share was set to moderate but the sale of Tesco's Asian asset could result in approximately 10.0% earnings accretion, the analysts added.

"Even if the maturing of Booker synergies and UK margin rebuild should translate into steadier EPS progress (we forecast +9% after +18% in 19/20). Against this, chances are that a much stronger capital structure will allow for nicely accretive options on the TSR front via exceptional cash distributions," they said.

And a "better-managed" Brexit would have "clear benefits for the real economy", including for consumer behaviour and the investment case for Tesco.

"A current 2020 [free cash flow yield] of 7.5%, pre any disposal accretion, shows the scale of this potential."