Tesco shares tipped to keep rising

Tesco (LSE:TSCO) has been described as a “port of calm” after a City bank said the grocer’s record as a high-quality stable compounder looked “even more compelling” amid the current volatility.

Flagging the potential for a further re-rating, Swiss bank UBS yesterday reiterated its Buy stance with an improved target price of 530p.

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The shares rose by 8.2p to 480.3p in today’s session to leave the UK’s biggest supermarket chain back where it was prior to the escalation of the Middle East conflict.

The flight to safety in the FTSE 100 index has so far been led by defence firm BAE Systems (LSE:BA.), which is up by 4% since Friday.

Other traditional safe-haven stocks such as British American Tobacco (LSE:BATS) and Imperial Brands (LSE:IMB) have limited losses to 2-3% so far this week, while AstraZeneca (LSE:AZN) is down 2%.

Shell (LSE:SHEL) shares are broadly flat as the benefit of the much higher oil price has been offset by disruption to its LNG operations in the Middle East.

BT Group (LSE:BT.A) is down 4%, a decline that partly reflects the fact that shares ended last week back near July’s multi-year high at 217p.

Deutsche Bank said today that BT shares have enjoyed the benefit of defensiveness to geopolitics, given that telcos are domestic businesses with little exposure to trade.

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A year-to-date rise of 13% also reflects a limited threat to revenues from AI, which in turn has its benefits for the telecoms industry in terms of cost cutting.

However, Deutsche Bank continues to have a Sell stance as it believes BT carries higher risks than peers with limited valuation support.

UBS’s backing for Tesco comes as attention turns to the grocer’s annual results on 16 April.

An expected operating profit of £3.1 billion is flat year-on-year amid significant cost inflation and the need for price investment in response to the competition from Asda.

The bank believes Tesco is well set to revert to profit growth in 2026-27, a forecast that is underpinned by an expectation for a more normal year of cost inflation.

It notes that Tesco is top of the UK’s supermarket Net Promoter Score rankings for the first time since 2017 and that recent Which? figures have shown pricing parity with Asda.

This week’s report by UBS adds that the recent re-rating of Tesco’s valuation multiple to 15 times forecast earnings from 12 times in 2024 was more than justified.

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This compares with the long-term average of 14 times, with UBS believing that the momentum of US giant Walmart Inc (NASDAQ:WMT) offered a template for further re-rating progress.

While Asda’s full-year results this month could remind investors of price competition, UBS said Tesco’s strong execution and a data driven ability to invest in what matters to customers meant it expected the chain to address the challenge and sustain market share gains.

The bank added: “As a high-quality, stable compounder Tesco is even more compelling in this environment of significant macro/geopolitical uncertainty in our view.”