Broker tips: Tesco, Morrison, Abcam, Greencore

Analysts at Jefferies upgraded their recommendation for shares of Tesco and Morrisons on Monday from 'hold' to 'buy', explaining that the pound has rallied against the dollar by well above 10% over the past year, while discount supermarkets' new store applications have fallen 25% in the past 2 years.

The analysts believed that after a cautious 15 months the time had come to review their stance on the UK grocery market due to the aforementioned factors and the fact that "wage challenges, whilst ongoing, are on a different scale relative to the position the industry found itself in two years ago."

The analysts added that a margin-focused Tesco, together with Asda's focus on free cash flows, made for a rational competitive backdrop, meaning that "the sector may be rediscovering its low Beta mojo at exactly the time when investors need it most."

Jefferies therefore revised its target price for Tesco up to 250p, while also highlighting the strongly accretive nature of the company’s merger with Booker for its free cash flows over the medium-term.

The above also assuaged the analysts' near-term concerns that investors were being overly optimistic on Tesco's stand-alone prospects.

Indeed, Jefferies analysts expected Tesco’s stand-alone EBIT margin to fall short of the company's 3.5-4% ambition - instead penciling in a margin of 3.3%.

Abcam's latest set of half-year figures revealed the company was growing at twice the industry rate, but with the shares up by 26% since Berenberg started coverage of the shares in June 2017, the German broker decided to downgrade its stance on the stock from 'buy' to 'hold', citig their valuation.

On the upside, Berenberg noted strong growth for the immuno-assay manufacturer in China and in Europe, Middle East&Africa.

Furthermore, the recent acquisition of Spring Bio was expecetd to add marginally to top-line growth in fiscal years 2018 and 2019, while the company's effective tax rate would decline from 21% to 19%.

But foreign exchange headwinds would knock-off about 2.5 percentage points from the company's rate of growth in sales and operating expenditures might come in between 1% and 2% higher than previously estimated, Berenberg said as it trimmed its target price from 1,240p to 1,230p.

Analysts at Berenberg marked down their target price for Greencore despite the favourable growth prospects for the chilled assembled convenience foods market, especially in the UK.

"In a competitive UK grocery retail market, the chilled cabinet, in general, and private label brands, in particular, are the most dynamic areas seeing the highest levels of growth, innovation and support from the retailers looking to differentiate their offerings in relatively profitable categories," they explained.

The analysts also labeleld the 9.5 times 2019 earnings multiple that Greencore was trading, and sector peer Bakkavor´s 11.5 price-to-earnings multiple, "undemanding".

Despite that, they marked down their target price for the former from 305p to 250p, albeit while keeping their recommendation at a 'buy'.

In the same research note, they initiated coverage of Bakkavor at a 'hold' with a target price of 210p.