Broker tips: Morrison's, Dominos

Berenberg has upped its rating on supermarket chain Morrison's, arguing that it stands to benefit from the proposed merger between rivals Sainsbury's and Asda.

The bank, which previously had a ‘hold’ rating on the stock, said the tie-up between Sainsbury’s and Asda could see all three listed UK food retailers – Tesco, Sainsbury’s and Morrisons – become “very appealing equity investments”.

But it argued that the deal would materially improve the investment case the most for Morrisons. “We identify Morrisons as the primary beneficiary of store disposals – around 15% EPS accretion – and upgrade the stock to ‘buy’,” it said.

The £7.3bn merger was announced last April. The Competition and Markets Authority is currently investigating the potential impact on shoppers and suppliers and is due to announce its findings shortly.

Berenberg believes it is “unlikely” the CMA will block the deal on competition grounds. But it could still insist on the disposal of up to 180 stores, with rivals such as Morrisons poised to snap up.

“Our only concern is valuation. However, after account for disposals accretion, Morrisons provides at 19% total shareholder return and valuation becomes appealing.”

Industry data released on Tuesday showed that Morrisons' sales increased 0.4% in the 12 weeks to 27 January, although its market share fell by the same degree to 10.6%.

Analysts at Liberum cut their target price for shares of Domino's Pizza on the back of a report in the Sunday Times of a boycott on new store openings by the chain's franchisees.

That price-sensitive information, analyst Wayne Brown argued, was at odds with management from guidance just one week before, when it argued that there was no ongoing feud with franchisees.

Indeed, according to the company, discussions with franchisees had been overwhelmingly positive.

The newspaper also cited company boss, David Wild, as having said that the board had no intention of changing the franchisee model.

"If this is the case, we see this price sensitive information as having a direct impact on the outlook and reinforce our SELL," Brown said.

"The CMD was backwards looking whereas our concern is how the model changes as the Group targets the opening of the next 600 stores. If nothing changes can this target be met and what will it take for the management team to start negotiating positively with franchisees?

"This situation is clearly unhealthy and hence risks in the UK are looming large, losses are rising Internationally and debt is at an all-time high."

The analyst also labeled guidance for break-even in the company's international arm in 2019 "optimistic" and cut his estimate for the company's like-for-like sales growth in the UK for 2019 and 2020 from 4% to 2%.

"We have been SELLers since July 2017 and we see more reasons now than back then to be cautious."