SocGen reiterates 'sell' on Tesco, struggles to understand what has happened
In a note to clients analysts at SocGen highlight the lack of detail provided to shareholders by Tesco´s management, with the company having offered no breakdown between the commercial income from suppliers and delayed accrual costs to explain its reduced profit guidance.
“At this stage, we are still finding it very difficult to understand what happened (significant accounting issues, poor practices with suppliers that might not be one-offs, lax internal control, governance),” the French broker goes on to add.
In the opinion of SocGen the retailer should follow the route taken by Carrefour when it traversed a similar situation three years ago and divest some non-core assets.
Averaging out a 20% discount to the European sector average and the discounted value of the company´s cash flows yields a price target of 190p for SocGen, which it maintains.
Under a worst case scenario, the UK trading margins would fall to 1.5% and earnings per share to 12.9p, implying a valuation of 150p.
That would be the threshold for viewing Tesco as a value stock, the broker concludes.
SocGen has reiterated its ´sell´ recommendation on the shares.