Tesco hit a two-month high on Monday amid optimism that first-half results next month will show the supermarket is rebuilding its UK profitability.
Macquarie forecast Tesco to report a 90 per cent jump in UK trading profit thanks to stable margins and lower costs.
The results could also give Tesco management an opportunity to give longer term margin guidance, having held back at April’s full-year results due to the launch a few weeks earlier of its “Farm Brands” own-brand range.
The Farm Brands initiative has improved price perception as well as volumes, argued Macquarie, which repeated an “outperform” rating.
“We believe Tesco can rebuild margins over next two to three years. With a 3 per cent margin and a more efficient balance sheet, it can generate a normalised EPS of 20p,” it said.
Tesco closed 4.2 per cent higher at 176.4p amid a wider market rally, supported by oil and mining companies.
The FTSE 100 added 1.5 per cent, up 103.27 points to 6,813.55, as Anglo American rose 5.7 per cent to 860.9p and Rio Tinto rose 3.5 per cent to £23.59.
Credit Suisse raised forecasts across the mining sector to reflect coal production curbs in China.
“Ironically enough, only six to 12 months after the majors suspended dividend payments or broke away from long-held progressive policies, cash flows look set to improve materially in the second half and 2017,” the broker said.
“While we are not bullish on the outlook for the core commodities, underlying free cash flows and dividends look relatively attractive against the market and this should provide a degree of valuation support.”
Glencore was up 6.2 per cent to 196.5p on an upgrade to “overweight” from Credit Suisse.
Coal’s rally means Glencore can afford to pay a “sustainable” 5 per cent dividend yield from next year, with “latent capacity” in copper and zinc providing a boost to longer term earnings that the market has yet to recognise, it argued.
Satellite broadcaster Sky took on 2.3 per cent to 859p on an upgrade to “overweight” from Morgan Stanley, its joint house broker.
While structural fears have pushed Sky to a decade-low valuation relative to earnings, management’s new bonus scheme implies earnings growth of 10 per cent per annum to hit 100p of earnings per share by 2021, said Morgan Stanley.
Shire took on 1.7 per cent to a one-year high of £51.83. US prescription data showed that Xiidra, Shire’s treatment for dry eyes, had taken a 7 per cent market share less than a fortnight after its launch.
Regus, the serviced office group, edged 0.4 per cent higher at 289.8p. After the close, Regus founder Mark Dixon began the sale of 37m shares, which would cut his stake from 31.7 per cent to 27.7 per cent.
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