City sticks with Tesco but share price falters

Tesco was down despite the flurry of buy notes that followed another set of record prelims. There were some quibbles about UK performance and growth prospects for the current year, but many brokers remain convinced of Tesco’s attractions.

Nomura maintained: “In our minds, Tesco is on the cusp of a material step-change in profits and returns as services and a recovering international business reflect a growing proportion of year-on-year growth.”

Oriel said that although there were no changes to forecasts following the results, “we were impressed with management’s confidence and the evolution of the Tesco story”. South Korea and China are likely to drive growth over the medium term.

Shore Capital said: “Diversification is a virtue to the Tesco investment story, taking the business away from a dependency upon the low-growth British grocery market and into less mature markets with superior growth credentials in new locations, activities and categories.”

Food retailers also suffered after the Office of Fair Trading (OFT) fined several grocers and two tobacco firms a total of £225m for alleged price fixing. Morrisons said that it would challenge the OFT’s findings.

Hold Game, advised KBC Peel Hunt after the entertainment group’s full-year profits plunged and the market was surprised by the departure of senior managers. The broker argued: “While current trading is likely to remain weak and the outlook for the first half is also somewhat downbeat, we believe the introduction of major new products in the autumn is likely to focus attention on the stock once again, with scope to drive the shares higher over the second half.”

Finncap initiated coverage of Debenhams with a buy note. The broker said department stores offer “structural advantages” over other high street formats, that management has a strong track record and that Debenhams “generates attractive rates of returns and retains substantial expansion potential”.

Home shopping business Flying Brands warned that a bad start to the gardening season means that it will be a “considerable challenge” to meet management’s profit expectations. House broker Singer said that the resulting 15% downgrade was “unhelpful”, but insisted the longer-term investment case remained unaltered.

Next week brings a swathe of announcements, including final results from Home Retail Group and N Brown and updates from Dunelm and HMV.