Analysts at Seymour Pierce have downgraded their view on shares of food retailing giant Tesco ahead of its report of first half results (to the end of August) on Wednesday October 3rd.

The broker believes that markets will focus on the company´s core UK business and an update on how the implementation of its six-point plan to update its store estate and offer is progressing.

They also want to see how the aggressive couponing has affected sales and profitability. "Attention will also be focused on whether the international business has slowed much from its Q1 update, particularly South Korea where new opening hour legislation was introduced at the end of Q1, as well as an update on the US where losses are still unacceptably high," they add.

More specifically, they detail how, given the recent TNS market share data suggested another slowdown in Tesco's UK sales post the end of the first half and lower first half sales expectations than they were forecasting, they are cutting their estimates for fiscal year 2013 profit before tax pre-exceptionals and for property profits by 4%, to £ 3,499m, earnings per share (30.1p), dividend per share (14.8p) and estimated fiscal year 2014 profit before tax by 3% to £3788m, earnings per share (35.6p), dividends per share (16.2p).

Furthermore, they are warning their clients that: "While the valuation is not the most demanding (calendar year 2013 price-to-earnings multiple ex-property profits of 9.7x and yielding 4.4%) given potential longer term growth, there is no visibility on where UK profitability will bottom and whether management actions will work in the medium term."

In addition, too many of its overseas businesses face trading issues short- term, they say.

With the shares having rallied 10% in the last 3 months, they believe that investors ought to be looking to take profits, particularly as they expect inflation to return, which has proved not to be positive for volumes or margin given the maturity of the UK market.

For all of the above reasons they are downgrading their recommendation to REDUCE from Hold (Hold since 8/12/11).

Lastly, the broker is forecasting a 6% fall in first half profit before tax to £1,603m and a flat dividend per share of 4.6p. "A fall in profits from the UK is expected to be partially offset by improvements in Asia, US and the bank and flat Europe," they explain.

AB

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