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Sainsbury's the only 'buy' as Berenberg sizes up the winners and losers in the UK grocery sector

Published: 09:56 03 Oct 2017 BST

Sainsbury's store
Against this rather miserable backdrop, Sainsbury's comes out as Berenberg’s “overall winner”

German bank Berenberg has given its winners and losers in the grocery sector in an initiation note today, talking about the “new normal” for the major players here in the UK, highlighting J Sainsbury plc (LON:SBRY) as its only 'buy'

It warned of: “Slow market growth, market share losses in the supermarket channel and intensifying competitive and cost pressures will continue to restrict growth and margin expansion for Tesco, Sainsbury and Morrison.”

READ: Credit Suisse says Tesco is “most at risk” from Aldi and Lidl’s continued growth

Adding: “With self-help dissipating, food retailers will be looking elsewhere for growth, and increasingly so, we believe.”

Ouch! Berenberg went on to challenge the conventional logic, stating that inflation is bad rather than good news for our shopkeepers.

It said competition - from the German discounters Aldi and Lidl - would likely subdue the impact on operating profit margins of rising prices.

The bank added: “We believe the market underappreciates the performance divergence over the cycle and in the long run; customer demographics, regional exposure, customer loyalty and scale will determine relative performance.”

Online threat as well

The continued growth of the discounters and the threat from online - Amazon.com Inc (NASDAQ:AMZN) in particular - needs to be factored into valuations too, analysts at the bank reckon.

Against this rather miserable backdrop, Sainsbury's comes out as Berenberg’s “overall winner”. It has initiated coverage of the stock with a ‘buy’ rating and a 300p price target.

Wm Morrison Supermarkets PLC (LON:MRW), meanwhile, begins life under the Berenberg team as a  ‘sell’ down to 200p. Tesco PLC (LON:TSCO) and Ocado PLC (LON:OCDO) are rated ‘hold’ with price targets of 180p and 286p respectively.

On the latter, Berenberg warned: “We are concerned about its top-line and margin sustainability as Amazon intensifies competition, especially given the customer overlap. M&A and its Ocado Smart Platform optionality offset these concerns.”

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