Berenberg cuts Sainsbury's to 'hold' as ASDA merger 'unlikely'

Analysts at Berenberg downgraded their stance on Sainsbury from 'buy' to 'hold' on Thursday, stating that the supermarket's merger with Asda is now "unlikely" following the publication of provisional findings by the UK’s Competition and Markets Authority.

The CMA highlighted "extensive concerns" around several elements of a planned merger between the two supermarket giants, citing possible grocery store disposals, as well as online, fuel and convenience problems.

"The CMA’s analysis rests on its application of a long list of unprecedented assumptions, which do not make any commercial sense, in our view. However, for the deal to become economically feasible, the CMA would have to make a U-turn on many of those assumptions. We believe this is unlikely so we cut our price target to 235p," they said in a research note sent to clients.

With the broker of the opinion that the merger will now likely be consigned to the rearview, Berenberg analysts focused once again on the company's underlying business, where they expressed concern that Tesco and Morrison's will continue to outperform Sainsbury's after having caught up on customer satisfaction scores.

Furthermore, the broker forecast weaker earnings momentum as it said that the synergies from its acquisition of Argos have already been "largely delivered".

And while such risks were now priced-in, the analysts believed the possibility of management changes and of so-called 'kitchen-sinking' would continue to drag on the stock and impede a re-rating.

"Sainsbury is one of the cheapest stocks in global food retail now, providing a 9% FCF yield (peers: 6%) while trading at 11x P/E (peers: 15x). There is, however, a risk that the CMA’s decision could lead to a series of negative events, ultimately resulting in management change, kitchen-sinking and a capital raise. We see no prospect of the share price re-rating until this overhang is removed," said Berenberg analysts.

Sainsbury's shares were down 0.37% at 233.63p at 1128 GMT.