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UBS raises target price for Tesco, thinks UK margin progression “is fine in context of a major price repositioning”

The Swiss bank’s analysts increased their target for Tesco to 270p, up from 260p previously, and reiterated a ‘buy’ rating on the stock
Tesco store
Having fallen back from initial gains yesterdays after the numbers, Tesco shares recovered today, adding 2.6%, or 4.70p at 188.65p

Analysts at UBS think that Tesco PLC’s (LON:TSCO) margin progression in the UK “is fine in context of a major price repositioning” and have raised their target price for the supermarket giant following yesterday’s first half results.

The Swiss bank’s analysts increased their target for Tesco to 270p, up from 260p previously, and reiterated a ‘buy’ rating on the stock.

READ: Every little fails to help: Tesco shares reverse as City looks beyond surprise dividend resumption

Having fallen back from initial gains yesterdays after the numbers, Tesco shares recovered today, adding 2.6%, or 4.70p at 188.65p. 

In a note to clients, the UBS analysts said: “For Tesco to hit its 3.5-4.0% group EBIT margin target (FY19/20E), c.45-55bps/annum of improvement at its UK business over 3 years (inclusive) is required.”

They noted that the group’s UK margin in the first half of 2.13% undershot this run-rate but said that with this considered in context “we remain sanguine.”

The analysts said their UBS Evidence Lab Pricing Monitor shows Tesco was around 150 basis points less inflationary than the market in the first half, so inflating in-line with its peers, it could have seen the firm hit its mid-term margin target already.

They concluded: “With repositioning now largely done, we see benefits of its £1.5bn opex plan, improved mix (private label, online, GM) and operating leverage dropping through more fully in 2H18 and beyond.”

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