Tesco PLC (LSE:TSCO)’s underlying progress and strengthening market position are being overlooked by investors obsessed with inflation, suggests Jefferies.
Interims are due in October and these should contain plenty of reasons to be cheerful, added the US bank.
In April, the supermarket guided for "broadly flat" 23/24 retail underlying profit compared to last year’s £2.5bn, but Jefferies has now raised its estimate to £2.62bn.
“Since that time, and against visibility on operating costs (contracted spikes in energy costs and hourly wage rates, but also c.£0.5bn of cost saves and an unquantified benefit from changes in the rate regime), trends in gross profit proved healthy, we believe.”
Sales should be healthy over the second half of the year at 6% like-for-like with improving mix dynamics and a competitive backdrop, where German discounters are showing signs of focusing on profit build for their maturing UK operations.
“From our side, we forecast first half retail profit of £1,369m this year vs £1,248m, for a margin of 3.99% or +8bps YoY."
Tesco’s current valuation implies the valuation context for a potential new world order reflected in the modest forward rating of 10.3 times.
“This ignores the potential for a more assured mid-term profit and free cash delivery, with evidence of this potential set to emerge at the interim [4 October].”
Jefferies’ price target rises to 320p from 310p with a 'buy' recommendation.
Shares rose 2% to 254.7p.