Analysts at UBS have raised their target price for retail giant Tesco PLC (LON:TSCO) on expectations for strong margin recovery and say they “are excited about what, post-merger, Tesco-Booker can become”.
In a note to clients, the Swiss bank’s analysts said: “We expect Tesco to hit the upper end of its 3.5-4.0% mid-term EBIT margin guidance and, moreover, to do so in a healthy way.”
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They pointed out that range rationalisation and closer supplier collaboration are helping improve the supermarket firm’s price position, underpinning a volume-led recovery in UK grocery, while its £1.5bn operating expenditure plan provides flexibility.
Beyond this, the analysts said, the Tesco-Booker 'new' entrant to the fragmented UK food wholesale market “will enjoy a huge competitive moat, with double digit price advantage, lower marginal cost to serve, plus superior offer in fresh and prepared food.”
They analysts said that, based on new pricing data, interviews with industry players and academic studies, they have raised their synergy estimate for the deal to £550mln, against company guidance of £200mln and have, as a result, have hiked their price target for Tesco to 260p from 235p.
With Tesco shares changing hands at 182.90 this afternoon, up 1.11% on last night’s close, they also repeated a ‘buy’ rating on the stock.