Tesco’s takeover of Booker has prompted multinational financial services firm JP Morgan to recommend its clients to buy shares in the grocery giant for the first time in five years.
The big broker said the tie-up was transformational for Tesco, as it now has a bigger addressable market – including the majority of the wholesale market – valued at roughly £30 billion.
Hailing its “visible turnaround”, JP Morgan added it has been persuaded to slap an “overweight” rating on Tesco, with a price target of 265p. Its sum-of-the-parts valuation is 307p.
JP Morgan previously had no rating for Tesco.
In addition, it predicts that Tesco – now with Booker – will generate around £1 billion extra in earnings before interest and tax, £4.4 billion of cumulative free cash flow and further net debt reduction of £2.2 billion by 2020.
Booker chief executive Charles Wilson is also set to become chief executive of Tesco’s retail and wholesale businesses in its core UK and Ireland markets.
“We turn buyers of Tesco shares for the first time in five years as its cash flow, top line and balance sheet have improved, while Booker adds new addressable market potential and strong execution capabilities with Charles Wilson now at the helm,” JP Morgan said in a note to investors.
The news has prompted shares in Tesco to rise to 216p, up 2.7 per cent on the day.
Tesco’s £3.7 billion merger with Booker – a wholesaler which also operates convenience retail fascias such as Budgens – was completed earlier this month.
“No deal is without execution risk; however, given the strength of both management teams and the decent shape of the two businesses, we see execution as an opportunity,” JP Morgan said.
It added: “We believe a stronger Tesco does not benefit Sainsbury given their geographic and customer overlap.
“We see Tesco’s strategy (seeking growth within wholesale, focusing on food, online and convenience) as more defensive than that of Sainsbury (focus on non-food).”