I wouldn't worry about him if he is still a 'young' reception child. as long as he is wanting to learn, and trying hard, then he will 'get it' very soon.
I have a very young YR1 child with my DS2, and he STILL cannot 'get' reading/words/matching word sounds, at all! He knows his phonics well enough, and can do 'a-n-d' and 'c-a-t' for instance, but 't-h-e' throws him completely and so he sits there telling me/teacher that he is bored. we are so frustrated with him, and I have to say that now I will not try with him at home, as I get wound up and that would be detrimental to him and me!
I read to him, he loves books, he will pick out letters and even small words like 'to' 'it' 'a' 'and' 'in' etc, but to give him a book and expect him to read it makes us all want to bang our heads against a wall.
I am so hoping that for MY DS, reading and words will 'click', but so far nothing so we are now on a waiting game.........
you are doing the right thing tho, as you are still encouraging him
as for me, I can try to encourage, but it drives me to drink, it really does.