Broker Nomura has begun coverage of food retailers with Tesco as a key stock pick.
Nomura analyst Nick Coulter sees scope for Tesco’s share price to reach 500p.
He said: “Tesco represents a microcosm of the trends driving the sector. More specifically, we think its UK business is under-appreciated and that the continued roll-out of small Extra hypermarkets, aggressive growth in services and sustainable cost savings will drive mid to high single-digit EBIT growth in a low-growth UK market, and higher returns.”
He said there was potential for Tesco to double the number of Extra stores to 400, adding £2bn to non-food sales.
Coulter expects food price inflation to continue in the grocery sector, supporting supermarket groups’ earnings generally. He said: “We also believe that retail brand equity is appreciating both in developing and mature markets.”