Downgrade cycle could still continue at Tesco, says Shore Capital

16th Apr 2014 09:41

Tesco's annual results may have received a warm reaction from the markets on Wednesday, but analysts at Shore Capital said the figures make for 'very disappointing reading' as they reiterated a 'sell' rating on the supermarket giant.Tesco's profits fell for the first time in 20 years in the year to February 22nd, though not as bad as the market had predicted. A 6.7% fall in group trading profit to £3.32bn was still ahead of the consensus forecasts of £3.24bn and Shore's £3.21bn estimate.However, Shore analysts Clive Black and Darren Shirley said that despite a 25% cut to their 2014/15 profit forecasts over the last year, "we cannot yet call the end of the downgrade cycle". They said that recent market share data in the UK and Ireland suggested "especially weak trading". "We have few reasons to believe that trading in these core markets for Tesco, even adjusting for the late Easter, will materially improve soon, leading us to flag up to investors the probability that we may be further reducing our forecasts for the financial year on a precautionary basis."Black and Shirley said they have maintained their negative stance on the stock given that Tesco's net asset value (NAV) per share of 182p continues to trade at a "considerable discount to the current share price", which closed at 286.3p on Tuesday."Note that Tesco's UK-listed peers, WM Morrison and J Sainsbury have shares that are trading at or close to their respective NAV/share," they said."When the cycle of downgrades ends we may be able to assess Tesco's underlying valuation on a more effective basis."The stock was up 3.7% at 297.01p by 09:51 on Wednesday.BC