New forecasts for Tesco

With the dust yet to settle following Tesco's latest profits warning, analysts at Deutsche Bank have taken the red pen to forecasts for the ailing supermarket and still see no reason to buy.

That's quite understandable. Just days before new boss Dave Lewis was called into the office a month early, the food retailer warned of a further slide in profits and slashed the dividend by three-quarters.

Deutsche now expects a 3.1% UK operating profit margin and group operating profit of £2.4 billion, which is at the bottom end of new company guidance. That will generate earnings per share (EPS) of 20.9p - down 13% from the 24p forecast previously. And the broker admits that Tesco may have to invest more in price cuts in excess of the savings made on cost reductions. That could slash UK margins to just 2.5% in 2015-16 and EPS by a further 7% to only 19.5p.

And shareholders should not expect a quick fix for the dividend, either. With the interim payout cut by 75% already, Deutsche thinks it sensible to factor in an identical blow to the final dividend. That would give dividend cover of over five times, but leave investors with just 3.69p for the full year compared with 14.76p last year, slashing the dividend yield to a mere 1.6%.

"We believe it prudent to assume a full 75% cut as we expect that financial deleverage and flexibility are likely to be a top priority for the new management team," says the broker.

"We lower the multiple we value the UK business on in our sum-of-the-parts from 6.0 times to 5.5 times, roll forward our valuation to 15E/16E EBITDA and reduce our price target from 280p to 250p."

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