Tesco PLC (LON:TSCO) impressed HSBC at its capital markets day, especially the spring that was back in management’s step.
“Perhaps the stand out feature was the corporate body language. Management were confident and believe in the company once again.
“Tesco is gaining momentum and, given its size, we argue this is bad news for Sainsbury and Morrison – a feature not yet recognised by the market.”
HSBC repeated its buy recommendation and 260p target price, giving 20% potential upside from today’s price of 217p.
It added that Tesco gave one of the most detailed presentations it had ever seen.
The basic strategy is to provide Sainsbury-type quality at Asda-type prices in the core range; to match the discounters at the entry level; and to be the best product at the top end.
The broker added that operating margin recovery (around 2 percentage points) will be underpinned by cost savings (2.7 points), while price cuts will be funded by high operational gearing, volume growth and improving economies of scale as Tesco grows.
The buy rating and its 260p target price was reiterated.