JPMorgan Cazenove cuts Tesco, Sainsbury's price targets

Tesco and Sainsbury’s were in the red on Friday after JPMorgan Cazenove cut its price targets on the shares, saying it remains cautious on the UK grocery space fundamentally, which based on its investor feedback "appears still to be a contrarian stance".

In a collaborative report between European Equity & Credit Retail, the bank said it had taken a closer look at potential upcoming catalysts for its more cautious stance on UK food retail.

"These include bearish read across from US & European peers to the UK grocers, an imminent mechanic slowdown in the UK grocers’ top line momentum (mirroring those of international peers, recent developments at which we detail in this note), heightened price competition clouding gross margin outlook, and reduced market share donor-status from Morrison, given prospective balance sheet strengthening," it said.

The bank cut its price target on Sainsbury's to 223p from 245p and on Tesco to 220p from 230p. Both rare rated ‘underweight’, along with B&M European Value Retail.

"The three seem actionable to us now in the context of: expectations that look MSD-DD% too high into the new year, 15-25% share price outperformance in the last 6-12M, leading to shares trading on 10-25% premium versus the sector, and investor sentiment which appears complacent," JPM said.

It added that from a credit perspective, actionable trades are less obvious. "Fundamentally, we think Asda is trading too tight and the market is applying too high a probability of a near-term refinancing," it said.

The bank remained ‘underweight’ Asda and said that Morrisons benefits from balance sheet optionality and a longer maturity runway.

"However, recent news flow (here) means spreads do not appear as compelling, and thus we retain a neutral recommendation."

At 1400 GMT, Tesco shares were down 1.5% at 294.30p, while Sainsbury’s was 1.9% lower at 276.10p.