"Glimmers of light" seen at Tesco but work still to do, brokers say

8th Jan 2015 09:19

After an "unimaginatively bad 2014", things are starting to improve at supermarket giant Tesco after a much better-than-expected Christmas trading performance, according to analysts at Shore Capital.Shore retained its 'hold' recommendation for investors, but said that measures being taken by new chief executive Dave Lewis to shore up the balance sheet should lower the likelihood of a near-term rights issue.Meanwhile, Hargreaves Lansdown Stockbrokers said that the current consensus rating on Tesco of a 'sell' is "unlikely to budge" for the moment but said: "Perhaps, at last, there are some glimmers of light at the end of the tunnel."Third-quarter like-for-like (LFL) sales excluding petrol declined by 3.8% in the third quarter, better than the 4.8% slump in the second quarter. Furthermore, the drop eased to just 0.3% over the pivotal Christmas trading period (six weeks to 3 January), compared with Shore Capital's forecast of a 2.5% drop.Shore analysts Clive Black and Darren Shirley said the highlights of the festive trading season were: 12.9% growth in grocery home shopping, a 22.2% increase in general merchandise sales, a 52.4% surge in online clothing, 4.9% growth at Tesco Express and the first positive reading of fresh food volumes in five years.Tesco also announced the closure of the defined benefit pension scheme to new entrant, possible sale of data-analysis division Dunnhumby, disposal of Blinkbox and confirmed that it would not pay a final dividend this year.While there remains "much more to be done" to improve the balance sheet, the analysts said that the moves announced on Thursday were "significant".Black and Shirley said: "With the steps undertaken today we do not rule out the possibility of a rights issue but we believe that it is towards the lower end of the priority for management at this time, noting as we do limited debt maturity requirements over the next couple of years. We sense that credit markets will warmly welcome the cost reduction programme, cut in capital expenditure, cut in dividend and selective potential disposal activity."While the analysts have not changed their "bottom-of-consensus" forecasts for Tesco, they said: "Important work has been undertaken that possibly brings such visibility and visibility that is favourable to the investors' eyes. We would expect the market to react favourably to this update today. Accordingly, we feel that our 'hold' stance is better underscored."The stock was up 9.5% at 199.2p by 10:32.Richard Hunter from Hargreaves Lansdown Stockbrokers said: "Tesco has delivered ground floor numbers against basement expectations."The share price reaction is evidence of almost palpable relief at a time when the market had come to expect poor news from any Tesco statement. [...] The market consensus of the stock as a sell is unlikely to budge for the moment, although future updates confirming a real, measurable and sustained recovery may improve sentiment."