Tesco shares slump on BoAML downgrade
Analysts at Bank of America Merrill Lynch have downgraded Tesco today to “underperform” on the back of rival Morrisons’ announcement last week to invest £1bn in slashing prices, causing the grocer’s share to fall to the bottom of investors’ shopping lists.
The bank said the implications of the shock announcement from Morrisons were “substantial” and has consequently lowered its profit margin target forecast from 4.8 per cent to 4.2 per cent for the current year. This comes after Tesco earlier this month announced it would effectively abandon its profit margin target of 5.2 per cent.
We do not think Tesco can afford not to participate in this materialising price war, particularly as the pressure to turnaround its disappointing sales performance is mounting.
Morrisons on Thursday sparked fears of an industry price war after saying it would invest £1bn over three years, including £300m this financial year, to narrow the price gap with discounters and win back customers. The move comes just weeks after Tesco pledged a £200m reduction on prices of everyday products.
However BAML believes Tesco need to invest a further £300m to that already planned:
We estimate that Morrison's price repositioning translates into an equivalent price investment for Tesco of up to £680m, i.e. an incremental £280m to that already planned. Even in the case that Tesco does not react, we still envisage a scenario whereby Tesco's top-line subsequently suffers and operational deleverage results.
It also anticipates a 12 per cent decline in dividend, in line with Tesco's guidance for dividend to grow in line with earnings per share.
Shares in Tesco closed down 1.31 per cent today at 299.73p. Morrisons, which had one of its staff arrested today after payroll data of 100,000 staff was leaked, saw shares fall slightly by 0.29 per cent.