Shore Capital said it took note of improved recent trading at Tesco implicit in the latest Kantar data from Ireland, but said the time had not yet come to invest.
After years of challenging trading conditions on the Emerald Isle, good work on price and proposition had evolved from better volumes into positive sales momentum and greater market share.
“Ireland may have lost a lot of its margin lustre for Tesco but it remains an important market where profit progress would be welcome,” the broker said.
Yet investors' skepticism regarding the potential from the “surprise” Booker merger, current leverage – especially the perceived drag from its pension responsibilities – and the more cautious sentiment towards the market leader since Amazon.com's decision to acquire Whole Food Markets were weighing on the shares, the broker told clients.
So while there was potential to be more positive on Tesco 'down the line', there was no need to jump into the shares in order to front-run a more favourable valuation in fiscal year 2020.
As well, the latter assumed successful execution of the business plan, a material reduction in leverage and no regulatory risk from the Booker transaction, Shore Capital said.
“So, the good news from the provinces of Ireland does not lead us to adjust our stance on Tesco's shares, which remains HOLD, noting firmer downside support but not enough upward oomph yet for aforementioned reasons.”