UBS has reiterated its 'buy' rating on Tesco PLC (LSE:TSCO), keeping a 12-month price target of 545p and pointing to a share price return potential of 16.45%.
Analysts Sreedhar Mahamkali and Angelo Mangieri made the call in a note dated 3 September, with shares trading at 468p at the time of writing.
The broker expects a reassuring first-half update from Tesco on 8 October, even against tough comparatives from a softer first quarter.
UBS has held its group earnings before interest and tax forecasts at £1.716 billion for the first half and £3.248 billion for the full year, towards the upper end of management's guidance range of £3 billion to £3.3 billion.
The broker expects the lower end of that range to be raised, reflecting what it called a rational market and no material change in consumer behaviour during the first half.
A pick-up in inflation in the second half, or stronger market share momentum, could push profit above the £3.3 billion upper guidance, UBS said.
Tesco had already completed 73% of its £750 million annual share buyback within the first half, the fastest pace since the programme began.
UBS said this leaves room for additional shareholder returns, though it expects any structural increase to the buyback to wait until preliminary results next April.
The broker also cited its Evidence Lab consumer survey, covering twelve years of data, to argue Tesco's execution remains best in class among mainstream grocers.
Tesco has led the sector on net promoter score since January, having overtaken Aldi, and its overall customer perception now ranks first ahead of Lidl, according to the survey.
The retailer also held price perception steady against Asda and was ranked the most attractively priced supermarket by 30% of respondents.
Customer visits and expected shopping frequency both improved over the past six months, UBS found, with Tesco and Sainsbury's the only retailers where spending per visit rose.
UBS forecasts second-quarter like-for-like sales growth of 1.8% in the UK, alongside a decline of 2% at wholesaler Booker, ahead of the annualisation of a key customer contract loss in early autumn.
Tesco shares have risen 3% since the first-quarter update and are up 6% since the start of the year.
At around fifteen times forward earnings, UBS said the stock remains broadly in line with its long-term valuation, with prospective total shareholder returns of about 12%.
