Tesco: Scarcity Premium?

J.P. Morgan maintains an Overweight rating on Tesco (TSCO.L) with a Feb-28 price target of 500p (prior 490p). Tesco's 1H update was sound: profit growth and margin expansion, with EBIT/net income/FCF beating expectations by 3%/4%/30% respectively, leaving an undemanding implied 2H. Management nudged up the full-year profit outlook to £3.15-3.3bn and topped up the buyback to £950m (from £750m). One weak spot was the 2Q exit rate of the UK core business decelerating to 1.3% vs 1.8% in 1Q, dragged by disinflation and non-food weakness, though volumes remain resilient. The UK grocery market is rational and no price war has yet commenced; Tesco's defensive profile, high-quality compounding, better capital returns and wide valuation discount (25-30% vs European staples on P/E and FCF yield) warrant a scarcity premium in the short term. Valuation uses a five-year DCF with a WACC of 10.9% and terminal growth of 1%. Sainsbury's is placed on positive catalyst watch.