Berenberg has upped its target price for ‘big four’ supermarket Tesco PLC (LON:TSCO) to 265p from 255p, predicting boosts to like-for-like (LFL) sales and growth in its wholesale division.
The German-based bank said the FTSE 100 group’s own-label initiatives “are the key operational focus for the company in FY 2019E.”
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“We expect revenue self-help to boost lfl growth for a further 18 months and raise our forecasts for FY 2019E lfl growth to 1.5% (from 1%) despite tough comps.”
Analysts also became more positive for Tesco’s wholesale growth opportunities following its £4bn acquisition of the UK’s biggest wholesaler, Booker:
“While it is entirely understandable that management has not upgraded its Booker synergy guidance five weeks into the new financial year, investors should note that the company’s revenue synergy assumptions are very conservative, in our view (we expect £280m synergies, ahead of £200m guidance).
“On our forecasts, the Booker deal adds c15% EPS accretion and c25% FCF/share accretion, with material deleveraging opening up the possibility of credit rating upgrades in the coming months and capital returns beyond FY 2020E.”
Additionally, Berenberg’s analysts said the company’s margin growth was ripe for expansion, given easing pressures on the industry: “We believe 3.5-4.0% EBIT margin guidance is more achievable than ever, implying only 30bp margin expansion over the next two years (versus c60bp margin growth in the past two years).
“With UK industry pricing pressures easing, volume growth returning to food retail, margin mix optimisation across the portfolio continuing and cost savings peaking, we raise our forecasts for group EBIT by 5%, which puts us at the lower end of margin guidance (3.5% EBIT by FY 2020E).”
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The target price change followed a strong set of full-year results for 2017, where Tesco saw its underlying operating profits jump by almost a third while LFL sales grew 2.2% in its core UK & Ireland market.
Tesco’s rebound has been largely attributed to the actions of chief executive Dave Lewis, who has been tasked with turning the company around following a controversy in 2014 when the supermarket chain overstated its profits by more than £300mln.
Tesco shares were up 2% at 230.1p in mid-morning trading Thursday.