Broker snap: Mixed Q1 belies underlying progress at Tesco, says Nomura

5th Jun 2013 09:41

Tesco's first-quarter results may have failed to enthuse the market on Wednesday but Nomura remained upbeat with a 'buy' rating on the stock, saying that a mixed performance masked the underlying progress made at the supermarket group.While the performance in the UK was a little worse than expected, international sales figures were in-line to slightly better. Nomura said that it would make no changes to its profit forecasts, explaining that "quarterly volatility is to be expected in the context of a multi-year strategy to deliver double-digit total shareholder returns".Like-for-like (LFL) sales excluding fuel in the first quarter were down by 1.0%, worse than the consensus forecast for a 0.7% decline. Nomura estimates that non-food sales LFL sales were down 6.0-8.0%, while grocery LFLs were flat. However, excluding the Frozen and Ready Meal categories - which were impacted by consumer concerns about horsemeat contamination - the broker said that grocery LFLs were positive and improving."With food growing faster than non-food, and the progressive elimination of margin-dilutive general merchandise SKUs, among other effects, we think Tesco will be forthright in both its reaffirmation of its c5.2% UK margin guidance, and its comfort with consensus expectations," Nomura said.Meanwhile, the broker said that customer perception metrics (most notably price following Tesco's Price Promise launch) have continued to improve."Our view of the underlying progress of the UK Plan is supported by Tesco's relative volume performance, which has remained positive on a one- and two-year view. The Kantar-based analysis also evidences Tesco's efforts on range, mix and price with lower relative average item inflation."The broker kept its 430p target price for the stock, implying 18% upside from Tuesday's closing price of 364.45p. The stock however had fallen by 3.39% to 352.1p by 09:51 on Wednesday morning.