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Tesco to benefit most as supermarket wages fall below inflation - Goldman

Tue, 5th Dec 2017 12:02


(ShareCast News) - Tesco and Morrisons were boosted by upgrades from Goldman Sachs, which upped its forecasts for both supermarkets as wages track below food price inflation for the first time in four years.

Sainsbury was given an increased price target on the stock but was kept on a 'sell' rating as Goldman said margin pressure in the UK grocery market is easing, adding that while competitive intensity is still high, multiple data points suggest 2018 will see greater industry margin expansion than 2017.

"Falling input cost inflation and less aggressive pricing strategy by discounters than during the last inflationary spike mean the gap between input costs and consumer food prices is now at its narrowest in over a year," the bank said in a note to clients, with margins benefitting as this is coupled with falling fuel prices and wages tracking below food CPI for the first time in four years.

Goldman upgraded Tesco to 'buy' ramped up to 220p from 155p, with less inflation still being passed through than its 'Big Four' peers but more in-line with the market since August.

As the biggest UK supermarket and with the superior cost savings programme put in place by CEO Dave Lewis, analysts at the US bank forecast Tesco can continue taking market share from Sainsbury's, Morrisons and Asda, as well as supporting like-for-like growth and reinvesting cost savings at a lower level than in the first half of the year

Therefore margin expansion should be greater than previously forecast and so estimates for earnings before interest and tax are up 5-17.5% for the 2018 current year through to 2020.

Potential synergies from the proposed Booker merger have not been included yet, but free cash flow per share could improve by up to 33% in the 2021 trading year.

For Morrisons, margin pressure is forecast to ease from the second half and into the following years, leading to the percentage of LFL profit dropping through of LFL sales increasing to 15% from nearer 9%, which drives EBIT estimates up 1%-3% in from 2018-20.

This helps drive the target price increase to 210p from 195p, with the stock upgraded to 'neutral'.

Goldman's Sainsbury's estimates are well below the consensus due to wage catch-up pressures for the lowest wage payer in the Big Four and non-food slowdown as weighing more as since the Argos acquisitions around quarter of revenues are in general merchandise.


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