City firm Shore Capital has downgraded Tesco shares from a recommended ‘buy’ to ‘hold’ on the back of today’s “disappointing” Christmas trading statement.
Shore Capital said Tesco’s trading update for the six weeks to 7 January 2012 “confirmed what secondary market share data has suggested and that is disappointing trading in the key UK retail division; indeed it is somewhat worse than expected”.
Total sales in the UK rose by 3.8% and ex fuel, ex VAT like-for-like sales fell by 2.3%, against a quarter three rate of -0.9%.
This performance was “reasonably materially below” Shore Capital’s anticipated range for UK trading over the festive period of minus 1% to 0%.
“In light of this performance we are going to be downgrading our Tesco UK trading profit forecast. We will finesse this a little later after discussion with management, but at this stage we suggest an 3.8% cut from £2.56bn to £2.47bn for 2011/12, but much bigger cuts for 2012/13.”
Shore Capital said Tesco trading in international markets has been “far more robust”.
“We have had our resolve tested on Shore Capital’s positive stance towards Tesco stock in recent periods and today we have to capitulate. In light of the work that must be undertaken and the need to see its output, we are downgrading our recommendation from ‘buy’ to ‘hold’. Once the market has digested the downgrades, which is likely to be a reasonable mark down today, we can then start to assess the value in the business.
“Whilst today’s update is a major disappointment, the downgrades reflect not just poor recent trading but a build up of matters, particularly in the core chain,” said Shore Capital.
City firm Jefferies International has decided not to downgrade Tesco from a ‘buy’ recommendation as it would be “adding insult to injury”.
“We are clearly disappointed with the chain of events and our target ambitions clearly need reviewing. However, we note cash flow strength, ratings and a June final dividend payment of around 11p,” said Jefferies International.
Source: Shore Capital/Jefferies International
