Exane upgrades Morrisons to 'neutral' after H1

Exane BNP Paribas upgraded Wm Morrison to ‘neutral’ from ‘underperform’ and lifted the target price to 200p from 165p following the supermarket retailer’s first-half results on Thursday.

“We have a positive stance on the UK food retailers but thought that Morrisons would need to reinvest nearly its entire cost savings. We are no longer convinced that’s the case,” said the bank.

It said Morrisons is a business burdened by paperwork, which damages the shopping experience and adds costs and complexity. However, Exane reckons the relatively new management team can continue to lift the burden, improve the retail, stay sharp on price and deliver some margin accretion.

It said Morrisons appears to be doing a good job of tackling non-productive costs, having saved £189m of costs in the first half, with earnings before interest and taxes up £20m.

It pointed out that cost headwinds (mainly employee wages) were £50m so the group invested about £120m in lower prices and the proposition in the first half.

“The cost savings and reinvestment are substantial but the plan is working; Morrisons sales momentum is better than we expected (Q2 LFL at 2% with transaction growth up 4.3%) and the improvement is looking increasingly sustainable.”

“With the ship steadier, Morrisons can now tackle big projects like sales-based re-ordering, previously put on ice due to the risk of disruption. Projects like that should free up time in store and, perhaps more importantly, improve availability and shelf/fridge life in turn helping sustain the retail recovery.”

At 0828 BST, the shares were down 0.1% to 207.90p.