Broker snap: Tesco pull-back creates buying opportunity, says Nomura

21st Jun 2013 11:01

Nomura has said that things are starting to look a bit better for UK supermarkets, as it reiterated its sector preference for grocery giant Tesco."Contrary to the negative commentary that the UK grocery market appears to attract, we think things are looking a little better," the broker said on Friday. "Market growth is c3.0%, broadly 1.0% volume growth with 2.0% underlying inflation after the efforts of consumers to 'dial out' inflation. The impact of new store openings is also moderating, falling to 2.1% in the last British Retail Consortium (BRC) food statistics versus 3.1% in May 2012."However, Nomura pointed out that non-food growth rates continue to be the point of difference between the country's Big Four retailers: Tesco, Sainsbury, Morrison and Asda."On a 52-week basis, we estimate that non-food has been c110 basis-points (bp) and c70bp accretive to Sainsbury's and Asda's total sales growth rates, respectively, but 50bp dilutive to Tesco and flattish for Morrison."Nevertheless, Tesco still remains Nomura's firm favourite as it kept a 'buy' rating and 430p target price. The broker highlighted that the company has still been able to post volume gains in grocery (on a one- and two-year basis) despite the headwind from the horsemeat scandal, and said that the recent fall in the shares over the past month "represents an opportunity".Morrison is rated 'neutral' (310p target): the broker said that while it is more comfortable with its trading propsects for 2013 - its self-help initiatives have improved volumes and Asda's push on pricing is fading - the grocer's Northern bias and low exposure to convenience/online "impede its progress".As for the other major listed supermarket stock, Sainsbury, Nomura also kept a 'neutral' recommendation (380p target), saying that while the shares have outperformed on the back of like-for-like sales growth momentum, own-brand inflation is a "persistent concern". The broker said: "Given the backdrop of Brand Match, Sainsbury's relative inflation suggests it is taking price in own label, a strategy that has enabled it to maintain margin solidity."