Broker snap: Panmure downgrades Tesco to 'hold' after Q3 weakness

5th Dec 2013 09:05

Tecso's share price was under continued selling pressure on Thursday after the release of its disappointing three-quarter results the day before, with Panmure Gordon weighing further on the stock after downgrading its rating from 'buy' to 'hold'.The broker highlighted "widespread weakness" as it cut its target price from 440p to just 320p. At its new target, the stock would trade at 10.6 times estimated earnings for the year ending February 2014.Panmure said that the supermarket chain's UK performance was as weak as expected, with a 1.5% decline in like-for-like (LFL) sales excluding petrol compared with a flat performance in the second quarter. The broker explained that most of the LFL deterioration appeared to be due to a 1% slowdown in market growth, as well as Tesco and its fellow Big Four grocers continuing to lose market share to Aldi, Lidl and Waitrose.Meanwhile, Tesco's international operations continued to struggle with the LFL decline in Asia worsening from 3.6% to 5.1%. European falls moderated slightly from 4.3% to 4% but there was "an alarming deterioration in performance in Ireland [...] as Tesco seemingly had no answer to aggressive competitor vouchering", Panmure said."Tesco stressed that success [in hitting its 5.2% margin target] can't be measured by market share, but in a zero volume growth market, continued share losses coupled with strong growth on-line must, we believe, inevitably put pressure on core store profits." As such, the broker expects UK margins of 4.8% from next year onwards."Tesco was at pains to stress its profits performance remains in line with consensus forecasts for both 2014E and 2015E, but it's difficult to escape the impression that they are running to stand still, fighting against operational de-gearing in their core store portfolio."The stock was down a further 1.72% to 334.15p by 09:35 on Thursday.BC