WM Morrison Supermarkets PLC (LON:MRW ) has been upgraded to ‘buy’ from ‘hold’ by analysts at Berenberg in a sector note in which they predicted an “exceptional 2020” for food retailers.
For Morrisons, the bank also upped its price target to 213p from 200p, saying they expected the firm’s sales to “surge as a result of increased grocery demand since the start of the UK lockdown in March” and that its “limited non-food and banking exposure” was positive compared to its peers.
READ: Morrisons launches coronavirus lockdown grocery service via Deliveroo
“The group’s lower price positioning is likely to appeal to consumers trading down, its partnerships with Ocado and Amazon enable the group to improve their online offering and Morrisons’ balance sheet supported by high freehold means the strong dividend yield is sustainable”, Berenberg added.
The bank also said it expected Morrisons’ wholesale business to be “a key beneficiary of sector consolidation post [coronavirus] , capitalising on the financial fragility of its sub-scale peers” and expected the group to achieve its £1bn wholesale sales target in its 2022 financial year.
Berenberg was less favourable towards J Sainsbury PLC (LON:SBRY), which it double downgraded to ‘sell’ from ‘buy’, highlighting the grocer’s bank business as a “key area of risk that has been underappreciated by the market”.
“We use [Bank of England] stress tests and believe its unsecured lending exposure will require substantial provisions, with capital injections dragging on free cash flow”, the broker said, cutting its target price for the supermarket to 170p from 250p.
READ: Ocado and Sainsbury's enjoy biggest spending boost from coronavirus lockdown
Analysts also said Sainsbury’s “high discretionary retail exposure will likely result in subdued sales beyond 2020 as cash-constrained consumers reduce spend”.
“This is accentuated by the fact that Sainsbury’s Bank may restrict lending (to preserve capital), which is used to fund non-food sales”, Berenberg said, adding that a need to inject cash into the bank will disrupt the company’s net debt reduction target.
Looking to the wider sector, Berenberg said Ocado Group PLC (LON:OCDO) remained their top pick and increased its target price to 1,725p from 1,635p while retaining the ‘buy’ rating, saying the company was “primed to capitalise” on the need for grocers to “adopt automated online solutions or face margin dilution”.
Meanwhile, the broker said Tesco PLC (LON:TSCO) was their top store-based grocer, retaining its ‘buy’ rating but trimming the target price to 275p from 280p.
“[Tesco’s] wholesale business will be a key beneficiary of sector consolidation; and it has significant scope for capital returns”, Berenberg said.
In lunchtime trading on Tuesday, shares in Morrisons were up 1.1% at 188.3p, Sainsbury’s was down 0.2% at 200.8p, Ocado rose 1.6% to 1,679p and Tesco moved up 0.7% to 236.9p.