Credit Suisse hails Morrison's positives, but says valuation expensive

Credit Suisse bumped up its target price for Wm Morrison, telling clients that its shares deserved a premium valuation versus those of Tesco and Sainsbury.

The Swiss broker reiterated its 'Neutral' recommendation on the shares while lifting its target price from 200.0p to 230.0p.

However, trading on 18.3 times' its estimate of future earnings the stock was already expensive on an absolute basis, which kept it from holding a more positive outlook.

Analyst Stewart McGuire highlighted the nearly complete change which the management team had undergone over the course of 2015, the fact that it had the best balance sheet in its sector, the most freehold property and the only pension plan (in his coverage universe) showing a surplus, not to mention operational improvements.

As regards his model, McGuire factored-in the higher depreciation and pension costs which management had already flagged, which would be offset by lower interest payments, its ongoing savings programme and reduced debt, all of which he "rolled forward" another year.

The analysts also raised his estimate for payrolls costs on account of the National Living Wage initiative, forecasting 0.7% growth in fiscal year 2018 like-for-likes.

He also assumed no inflation.

All of the above left his fiscal year 2018 estimate for profits before tax at £375.0m, down from £387.0m.

Worth noting, in fiscal year 2020 the National Living Wage would cut into PBT by -£65.0m, he said.

Another two "key" risks which were outside of the grocer's control were Aldi and Lidl's store roll-out plans and, in their view, going forward inflation would be more of a headwind, than a tailwind.

Shares in Tesco and Sainsbury were changing hands on fiscal year 2019 price-to-earnings multiples of 14.4 and 12.0, respectively.