Credit Suisse has raised its target prices for the three FTSE 100-listed UK supermarket groups after revisiting a bearish thesis on the sector held since 2015.
In a note to clients entitled ‘The re-invention test’, the Swiss bank’s food retail analyst, Stewart MacGuire pointed out that although market share declines continue, deep cost cutting has raised operating profits.
MacGuire pointed out: “Various corporate actions such as M&A and wholesale / JV agreements have been used to try to address the thorniest issues within UK grocery – unproductive space in large stores, unfettered discounter growth and poor online economics.”
He said: “Given the market structure and trends, we do not see the potential for a positive inflection point.
But added: “What is clear, is that a sustained recovery is predicted within current market forecasts, particularly for Tesco.”
Tesco "overexposed to large stores"
The analyst upped his target price for Tesco PLC (LON:TSCO) to 145p from 140p but retained an ‘underperform’ rating on the supermarket sector leader.
He said: “Tesco is overexposed to large stores and has the highest market share in margin-dilutive online grocery. Risk to consensus forecasts appears high.”
Weak near-term grocery results "priced in” for Sainsbury’s
MacGuire is more upbeat on the grocery sector’s number two player, J Sainsbury plc (LON:SBRY) repeating an ‘outperform’ rating on the stock while raising its target price to 320p from 300p.
The analyst said that as non-food synergies are realised earlier than predicted following Sainsbury’s acquisition of high street catalogue-based retailer Argos last year he sees additional savings coming in from full-year 2020 onwards.
He also added that he believes “weak near-term grocery results are priced in” for Sainsbury’s.
"Fix" phase’ for Morrison’s nearly over.
Finally, MacGuire remains ‘neutral’ on the UK’s fourth biggest grocery sector player, William Morrison Supermarkets PLC (LON:MRW) but raised its target price to 240p from 230p.
He said ‘the "fix" phase’ for Morrison’s is nearly over.
“Now that operations have been stabilised, management has embarked on a series of capital-light growth projects from which we expect modest growth,” the analyst concluded.