Tesco analyst maps out recovery to 300p a share
7th December 2018 11:38
by Lee Wild from interactive investor
German discounters changed Britain's food retail landscape forever, but UK supermarkets are fighting back. Lee Wild explains what's exciting Tesco's growing fan club.
Eleven years ago, under the stewardship of Terry Leahy, Tesco shares had tripled in value and seemed untouchable. The subsequent decline from near-500p to a 20-year low at 137p in 2016 is well documented, and the shares remain volatile, but we’re hearing positive noises this week.
On Tuesday, our technical analyst Alistair Strang discussed the prospect of a "Christmas miracle", and his forecast is beginning to ring true. You can read his full analysis by clicking the headline below.
Now, just hours after a fraud case against two former Tesco directors collapsed, the grocer has found support in the City. Following recent half-year results and lacklustre industry data, highly-regarded analysts at UBS have backed the UK’s biggest supermarket to go substantially higher.
Source: TradingView (*) Past performance is not a guide to future performance
It believes the Kantar figures underpin earnings per share growth from 10.2p in the year to February 2018 to 13.4p this financial year, then 16.5p and 19.8p in 2020 and 2021 respectively. Analyst Daniel Ekstein also believes there's a "reasonable possibility"Â that management could begin a share buyback next year.
"We don't think management intends to retain 'excess' cash on the balance sheet, meaning alternative methods of capital return are possible,"Â he says.
"We see sufficient firepower for a buyback to be big enough to matter."
Pulling the trigger would "send a strong signal and create shareholder value in a low-risk manner", given the shares currently trade on a discount to net asset value of over 30%. Importantly, it does not think this potential catalyst is built into consensus expectations.
Rationale for a buyback, possibly in excess of £1.5 billion, is based on a much-improved balance sheet and upgrade to investment grade by credit agency Fitch. Tesco bosses have also snapped up over £500,000 of stock recently, implying confidence in the outlook and value in equity.
"Quant studies show companies with buybacks of >5% typically deliver better share performance (c.5% vs market) and more consistent results,"Â says Ekstein.
What's more, any buyback should not compromise the dividend, with UBS still pencilling in 5.1p for the current year, rising to 8.3p next year and 9.9p for February 2021.
Currently trading on 14.9 times UBS earnings estimates for this full-year and yielding 2.6%, then 12 times and a prospective 4.2% in 2020, the broker rates Tesco a 'buy'Â and backs the shares up to 300p.Â
*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.
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