Tesco is a 'buy' as second half can raise cautious expectations - broker

Shore Capital maintains its 'Buy' rating on Tesco PLC, citing the supermarket's robust free cash flow generation and defensive investment strategy that has underpinned market share gains despite inflationary pressures. The broker anticipates approximately 5% UK like-for-like sales growth and £1.6 billion group EBIT for H1, suggesting potential for an upward revision of the lower end of Tesco's full-year EBIT guidance and raising H2 expectations. The investment thesis is further supported by significant buybacks and a strong asset-backed balance sheet.

Analysis

Shore Capital has reiterated its 'Buy' rating on Tesco PLC (LSE:TSCO), framing the supermarket as a 'consummate cash compounder' with a resilient investment case ahead of its interim results. The broker's positive stance is underpinned by Tesco's strong free cash flow generation, significant share buyback program, and a robust asset-backed balance sheet. Despite headwinds from UK food inflation and competition, Tesco's defensive strategy has seemingly protected its price positioning and driven market share gains. Shore Capital forecasts approximately 5% like-for-like sales growth for the UK in the first half but a group EBIT of £1.6 billion, which represents a 3.3% year-on-year decline. Nevertheless, the analyst suggests that Tesco's initial full-year EBIT guidance of £2.7-£3.0 billion was cautious, and a strong H1 could lead to an upward revision of the lower end of this range, with potential to raise H2 expectations pending clarity on the festive trading season.

Key Decisions for Investors

• Investors might consider the reiterated 'Buy' rating and potential for an upward guidance revision as a positive catalyst, supported by the company's strong cash generation and capital return policy.
• It is crucial to scrutinize the upcoming interim results for confirmation of both the 5% like-for-like sales growth and management's explanation for the forecasted 3.3% YoY decline in H1 Group EBIT.
• Traders should monitor the company's performance and commentary regarding the competitive landscape and inflationary pressures during the festive trading period, as this will be key to validating the analyst's more optimistic H2 outlook.