BofA Merrill Lynch double upgrades Morrison to 'buy'

The bank pointed out that Morrison has one of the strongest balance sheets in the sector, a capital light growth plan, self-help opportunities, is close to net cash and has one of the most attractive cash flow valuations in the sector.

“We believe that its strong balance sheet position and resultant cash optionality deserves a premium,” it said, adding that it looks as if the stock is trading on a 20% discount versus the sector.

Merrill said chief executive officer David Potts’ key strategic moves have included a new wholesale partnership with Amazon and Rontec and renegotiation of its Ocado contract. All of these moves should help to expand future earnings without the need for significant capital, it argued.

Merrill said the continued deleverage suggests the group could turn net cash in 2022, suggesting the price-to-earnings ratio will de-rate as debt continues to decline.

The bank’s base case scenario is for EBIT margins to stay flat in 2018E at 2.6%.

Its upside scenario is that Morrison moves to share profitability of its wholesale business and greater than expected efficiencies in store could mean operating margins rise to 2.75%, an increase of 0.15% from the base case.

A downside scenario would see a sizeable amount of unpassable food inflation, which could lead to margin contraction to 2.5%.

At 0920 BST, the shares were up 2% to 241.90p.