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Morrisons a 'sell' due to 'limited opportunities', says Berenberg

Tue, 3rd Oct 2017 09:06

(ShareCast News) - Morrisons is vulnerable to a derating if sales slow, said Berenberg as it initiated coverage with a 'sell' recommendation, with Sainsbury's preferred as the top pick for the sector.

After two years of stellar execution since David Potts took over as chief executive, Berenberg said the incremental self-help and catch-up opportunities were now "more limited" for the Bradford-based grocer.

While growth is accelerating for the UK food retail sector as inflation returns, competitive pressures mean the margin impact will be less favourable and Morrisons is felt to be the most most exposed to sector challenges, with performance diverging between the Big Four companies based on customer demographics, regional exposure, customer loyalty and scale.

For Morrisons, Berenberg told clients in a note on Tuesday that it sees "significant cyclical and structural pressures mounting" from rivalry with discounters Aldi and Lidl's store expansion and the looming presence of Amazon.

"With Morrison trading at a premium to UK and global peers, slowdown in LFL momentum could drive a de-rating," the bank said, setting a target price of 200p that pointed to 15% downside from the previous day's close.

"As discounters grow, winners and losers will not be determined by geographical, but by customer and proposition overlap," analysts wrote (which echoed sentiments from Credit Suisse earlier in the week).

Online grocery sales, a margin-dilutive channel for supermarkets, will continue to drive most of growth for the big four in the long run, cannibalising stores.

However, analysts feel the big four and Ocado are "missing the key ingredient for taking market share in online: capital flexibility to compete with Amazon in the increasingly unprofitable online grocery channel".

Sainsbury is the preferred stock in the sector, given a 'buy' rating and a 300p target price, as its long-run LFL outperformance is forecast to continue as recent headwinds dissipate and inflation accelerates.

"With the stock trading at a 15-20% discount to peers, improving LFL momentum could drive a re-rating."

Tesco's investment case "continues to rely on margin recovery in the UK business, which is seen as potentially challenging given the structural and competitive pressures in the market.

The Booker deal is a positive and adds 19p the target price to take it to 180p, with the shares given a 'hold' rating.

Ocado is also a 'hold', with a 286p price target, felt to be the structural winner in the online grocery channel.

"However, we are concerned about its top-line and margin sustainability as Amazon intensifies competition, especially given the customer overlap. M&A and its Ocado Smart Platform optionality offset these concerns."

Related Shares:
Ocado Group (OCDO)

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