Nomura has cut its forecasts for supermarket giant Tesco on the back of a weaker trading in Europe, but has maintained its ‘buy’ rating, hailing the group’s strong UK grocery performance.

Tesco reported that third-quarter UK like-for-like (LFL) sales excluding fuel and VAT were down 0.6%, but this was better than Nomura’s estimated -0.9% decline.

The broker said that the results underscored the latest industry figures from Kantar (which showed recent market gains), as the grocery LFL growth improved from around 0.5% in the second quarter (according to Nomura’s estimates) to 1.2%.

Nevertheless, Nomura highlighted that, despite positive clothing LFLs, the non-food performance in the UK deteriorated.

Elsewhere, Asian LFL sales fell by 1.2%, better than the broker’s forecasted 2.1% decrease, but Europe LFLs were down 3.6%, worse than the -2.6% estimate, driven by a poor performance in Poland.

‘While we clip our FY Feb-13E earnings per share [EPS] by 2% for Europe, we think Q3 evidences clear momentum in the core UK grocery offer.’

Tesco also announced on Wednesday that it would be undergoing a strategic review of its Fresh & Easy operation in the US, which the broker believes will likely lead to an exit of the region.

Nomura said: ‘With a pathway to profitability and acceptable returns unclear, we expect Tesco to explore its options with respect to a full or partial disposal, a partnership, or the realisation of assets. We estimate the net asset value to be c£1bn, with most stores rented.’

The broker said that the strategic review ‘points to a management team willing to act decisively to improve its capital allocation and discipline.’ Nomura reckons that a US exit will benefit full-year EPS and return on capital employed (ROCE) by 4% and one percentage point, respectively.

BC