Morrison and Tesco slump on Deutsche Bank downgrade

Tesco and Morrison were under pressure after Deutsche Bank downgraded the stocks as it took a look at the UK food retail sector.

The bank resumed its coverage of Tesco following a period of restriction, cutting the stock to ‘hold’ from ‘buy’ and chopping the target price to 210p from 240p.

“Our conclusions suggest that there is limited upside to sector profitability and that Tesco’s historical margin premium will narrow,” the bank said.

It added that net proceeds from the disposal of the South Korea business were less than it had factored into its sum-of-the-parts.

The disposal was even more cash dilutive than earnings dilutive, given the low capex budgeted for the country, said DB.

Deutsche downgraded Morrison to ‘sell’ from ‘hold’ and cut the price target to 155p from 180p saying the company had the right balance sheet but the wrong competitors.

The bank said Morrison has the greatest customer overlap with the discounters and Asda, due partially to its geographical exposure and its customer demographic.

DB said it expects Morrison to deliver the lowest like-for-like sales growth of the 'Big Three' supermarkets, with compounded LFL sales down 6% versus -1% at Tesco and flat sales at Sainsbury over the three years to 2017.

Deutsche kept Sainsbury at ‘hold’ but trimmed the target price to 265p from 275p. It said the company has good geographical and demographic exposure and a strong convenience business. However, it pointed to the risk of further price investment in 2016.

At 0940 GMT, Morrison shares were down 3.4% at 158.30p while Tesco was 3% weaker at 173.15p.