Market Report: Tesco declines as broker compares it to peers

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The Independent Online

Tesco failed to make any headway last night, with Citigroup saying that, when compared more closely to peers, the supermarket giant offered less in the way of value.

The broker said that while there was nothing incorrect about Tesco's accounting methods, the group, which fell by 2.5 per cent, or 9.8p, to 380.05p, did have a "more aggressive policy" than others when it came to revenue recognition, depreciation, the allocation of profits from property, capitalised interest expenses and pension accounting. The total impact of these "increasingly strident policies" is that they "render the [profit & loss] bottom line significantly different from what a peer company might report", Citi explained.

"If we put Tesco on more comparable accounting to other companies in our sector, it appears to be a much less profitable entity," the broker said, reiterating its "sell" view with a revised 350p target price, compared to 400p previously. Citi went on to say that its "alternative" earnings per share figure for 2009-10 was 24.2p, whereas the underlying earnings per share figure "defined by Tesco" was 31.7p. When it came to pre-tax profits, the broker's "alternative" figure was £2.6bn, against Tesco's figure of £3.4bn.

Overall, the markets steadied last night, with the benchmark FTSE 100 index standing firm at 4,916.87, up 2.65 points, and the mid-cap FTSE 250 index closing at 9,366.12, up 0.83 points. Sentiment strengthened after the European Central Bank said that lenders had called on it for €131.9bn in three-month funds ahead of the expiration of a key 12-month facility valued at €442bn. The rollover was lower than expected, and indicated that not only had banks continued to pare back their balance sheets, but that they'd also managed to build up their liquidity buffers. Pleased with the results of the three-month auction, market-watchers had their eyes on the take-up of today's six-day ECB liquidity facility, with Goldman Sachs saying that, taken together, the two financing auctions "should give us a complete picture of the amount of replacement financing taken out by eurozone banks".

The ECB news supported Barclays, which also held an investor seminar on its global retail banking business yesterday. The stock rose by 3.2p to 270.55p, outperforming others such as Lloyds, which was broadly unchanged at 53.7p, down 0.11p, and the Royal Bank of Scotland, which was 0.34p behind at 41.43p, as lacklustre US unemployment figures undermined the mood. In the wider sector, Standard Chartered, which said it will invest $500m in the Agricultural Bank of China's mammoth flotation in Hong Kong, also lost ground, shedding 18.5p to 1,641p.

The pharmaceutical giant AstraZeneca was the strongest of the blue chips, rallying by more than 7 per cent, or 222p, to 3,169p as investors welcomed the company's success in a key patent trial involving the Crestor cholesterol drug in the United States.

Responding to the news, JP Morgan Cazenove upped Astra to "neutral" from "underweight", while UBS revised its target price for the stock to 4,100p from 3,800p, and Morgan Stanley raised its target to 3,690p, compared to 3,540p previously. Panmure Gordon also weighed in, moving its target to 3,600p from 3,300p to reflect the news. Evolution remained bearish, however, repeating its "sell" stance and saying that the news didn't change the fact that its estimates still pointed to a "significant" sales decline for Astra by 2020.

On the downside, Man, the London-based hedge fund group, was the weakest of the blue chips, shedding more than 7 per cent, or 17.8p, to 223.3p in ex-dividend trading. In some positive news, overnight figures showed a 2.2 per cent rise in weekly net asset values at its flagship AHL fund.

Beyond Man, the miners dominated the loser board following a worse-than-expected report on US private sector payrolls, with commodity markets softening amid worries about the sustainability of the recovery in the world's largest economy.

Kazakhmys and the Eurasian Natural Resources Corporation were among the weakest, shedding 38p to 994p and 32.5p to 861p respectively. The former lost ground despite the bears at Evolution turning positive. Taking its cue from the recent correction in the Kazakhmys share price, the broker switched its stance to "add" from "sell", albeit with a lower 1,185p target price, compared to 1,270p previously.

Further afield, housing stocks were unsettled after the latest house price report from the Nationwide evidenced a slowdown in the pace of growth. Responding to the figures, Howard Archer, an IHS Global Insight economist, said housing market activity was "currently relatively low", with economic fundamentals "not exactly ideal". "We believe that house prices are likely to be erratic over the coming months and at best will make very modest gains over the rest of the year," he said as Barratt Developments fell by 3.2p to 94.8p, and Bellway lost 12.5p to 615.5p.

Elsewhere, JJB Sports added another 30 per cent, or 3p, to 13p amid rumours of stake-building and bid interest, with speculators highlighting talk of a possible offer price of 25p per JJB share.

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