JP Morgan cuts Morrisons to 'underweight'

Investors should steer clear of UK food retailers, JP Morgan said as the bank downgraded Morrisons to 'underweight' and cut its share price target for the supermarket group.

JP Morgan cut its rating on Morrisons' shares from 'neutral' and reduced its price target to 160p from 175p based on a bleak view of the sector and the company's own prospects. Morrisons shares fell 3.1% to 172.65p at 13:42 BST.

The big four UK supermarkets are unlikely to benefit from spending transferring to in-home from out-of-home as they continue to lose market share, JP Morgan said. Customers are trading down during the economic downturn and discounter momentum is picking up again, the bank added.

Shoppers are continuing to shift to online and convenience and Brexit will add to costs, JP Morgan said, adding that Morrisons, Tesco and Sainsbury's had changed management and Walmart was looking at how to divest Asda.

Morrisons' first-half results and outlook were within expectations but profit fell 25% from a year earlier, JP Morgan's Borja Olcese said. Earnings were almost flat excluding business rates relief and coronavirus costs despite like-for-like sales up by double figures. This was worrying, he said

With fewer employees per square foot than competitors, leaving it less room for "self-help", Olcese said. Brexit could put pressure on tariffs and labour for the sector and Morrisons has not got many cash flow improvement options left, he said.

We see momentum slowing down combined with little further self-help," Olcese said in a note to clients. "This should trigger an inflection in capital returns. We sit below the market and believe shares are expensive … We would continue to avoid the UK."