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Tesco was a gainer on Tuesday after hopes of a margin recovery led Goldman Sachs to switch its recommendation from “sell” to “buy”.
Food input cost inflation had peaked while consumer food prices remained elevated, which meant margin pressure on the grocers was easing, said Goldman. The broker also cited falling fuel prices, the benefit to operating costs of food inflation outpacing nominal wage growth, and signs that the discounters are becoming less aggressive both on space expansion and pricing.
“Scale and a superior cost savings programme mean we forecast Tesco can continue taking share from the big four, supporting like-for-like sales growth, while reinvesting cost savings at a lower level than in the fiscal first half [ended August]. This should drive greater margin expansion,” said Goldman.
It put a 220p target price on Tesco, which rose 3 per cent to 201p. Sector peer J Sainsbury added 2.7 per cent to 239.3p even after Goldman kept “sell” advice on a raised 220p target.
Weakness among the commodity stocks dragged the wider market lower as the FTSE 100 faded 0.2 per cent or 11.47 points to 7,327.50. Anglo American was 2.5 per cent lower at £13.51 and Glencore was off 2.3 per cent to 334p as the pound recovered from session lows.
Tullow Oil rose 2.3 per cent to 187.6p after Merrill Lynch advised a switch out of Cairn Energy, down 1.1 per cent to 212.4p, as part of its 2018 exploration and production sector review. With risks around refinancing and acreage now settled, Tullow looked cheap based on a cumulative cash flow yield of 50 per cent over the next three years, said Merrill.
Serica Energy rose 8.3 per cent to 59p on the back of “buy” advice from Peel Hunt, its house broker.
Serica’s deal to buy stakes in three North Sea fields from BP is “a landmark transaction” that “will overnight propel it into the mid- tier of the UK’s independent oil and gas industry,” said Peel Hunt, which set a 105p target price.
Millennium & Copthorne Hotels was squeezed 4.1 per cent higher to 584p amid speculation around whether City Developments Limited, its majority shareholder, would sweeten its bid proposal ahead of Friday’s Takeover Panel deadline.
Aim-listed Lionsgold eased 9.8 per cent to 2.95p, having jumped 237 per cent in the previous two sessions. The surge came after Lionsgold raised funds from “a group of high net worth individuals” by selling shares at 0.8p and linked warrants at 1.2p. The new cash, the company said, would back the development of Goldbloc, its “global digital currency backed by gold”.