Morrisons trumps Sainsbury's and Tesco, reckons Exane BNP

Fears about Amazon are already baked into the big UK grocers' share prices, and while Exane expects cash to begin flowing for the sector, shareholders are "at the back of a queue of liabilities which can be hard to measure".

Exane, which kept its 165p target price on Tesco but dropped its 'neutral' rating, said the recent 10% rebound in its shares over the last two months had skewed risk/reward to the downside.

In a note focusing on the balance sheets of the UK supermarket groups, the principal concern for Tesco is a large pension deficit representing around 60p per share.

While difficult to calculate precisely, the deficit "seems likely to be stubborn".

With like-for-like sales now competitive and its valuation lower, Sainsbury’s is seen as more attractive than Tesco, even though its balance sheet has its own major challenges.

However, expectations for the Argos owner are very different, with its valuation 9.6 times 2019 enterprise value versus EBIT, versus 13.5 times for Tesco.

"At present, the LFL spread between the Big 4 is the narrowest we can remember so having chided Sainsbury’s for underperforming, we’re not sure the valuation spread is fair," Exane said.

Morrisons has "comfortably the strongest balance sheet of the Big 4", principally as it owns 90% of its store estate and has a net pension asset, with analysts predicting that buybacks are likely.

"Coupled with continued improvements in the offer, a favourable format mix, catch-up potential in fast growing, higher margin categories like organics, not to mention cost saving, we think the business is the most attractive of the UK food retailers."