Berenberg upgrades Morrisons, double-downgrades Sainsbury’s

Berenberg double-downgraded its stance on Sainsbury’s to ‘sell’ from ‘buy’ on Tuesday but lifted Morrisons to ‘buy’ from ‘hold’ as it took a look at the food retail sector.

"While our analysis indicates that the grocers can achieve absolute profit growth at their retail businesses, and the UK grocers are best positioned through the business rates ‘holiday’, we expect them to mitigate these benefits as all the grocers in our coverage would face external pressures if they demonstrated exceptional profit growth," it said.

The bank said it expects Sainsbury’s non-food retail exposure and banking business to drag on performance, adding that grocers with banking businesses have been overlooked by the market.

"Their unsecured lending exposure will have to book significant loan losses and may require substantial capital injections in order to maintain sufficient liquidity," it said.

Berenberg said Morrisons will benefit from increased food demand, its limited non-food exposure will have a lesser drag, the wholesale business will be a beneficiary of sector consolidation and its balance sheet strength provides dividend security.

Morrisons’ target price was upped to 213p from 200p while the target on Sainsbury’s was cut to 170p from 250p.

It remained at ‘hold’ on Ahold Delhaize, Carrefour, Jeronimo Martins and Metro.

Buy-rated Ocado remains Berenberg’s top pick in the sector. "Grocers need to adopt automated online solutions or face margin dilution; in our view, Ocado is primed to capitalise on this and we expect it to secure more deals following the crisis," it said.

Meanwhile, buy-rated Tesco is the bank’s top store-based grocer. "Its adoption of automated online grocery technology will help minimise margin dilution; its wholesale business will be a key beneficiary of sector consolidation; and it has significant scope for capital returns," it said.