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Charles Stanley downgrades Tesco to 'reduce'

LONDON (ShareCast) - The income attractions for holding Tesco (Xetra: 852647 - news) 's stock have gone, according to Charles Stanley (LSE: CAY.L - news) which downgraded its recommendation on the supermarket giant from 'hold' to 'reduce'. A poor performance in the UK, Asia and Europe resulted in a 58% collapse in operating profits to £1.39bn in the year ended February 2015.

"The new management team has faced reality and decisive action is being taken to revive the UK operations and strengthen the balance sheet," said analyst Sam Hart.

He highlighted the recent improvement in UK sales trends - UK like-for-like sales fell 3.6% for the year but by just 1% in the fourth quarter - which it labelled as "mildly encouraging".

"Guidance is for operating profit to be flat in the current year at c£1.4bn and we see potential for profitability to begin to recover on a three year time-horizon. The valuation (February 2016 PE 23.2x), however, implies that a rebound in the UK operating margin to c.3% (2014/15: c.1%) is already discounted," Hart said.

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Morrisons and Sainsbury, meanwhile, trade at 17.4 and 11.6 times prospective earnings, respectively.

Hart said Tesco's dividend is likely to remain suspended until 2016/2017 at the earliest. He said: "The medium-term investment case for continuing to hold the shares is unclear."