HSBC has come up with more reasons to hold Morrisons' stock.
The bank said the supermarket chain continues to address strategic concerns, citing yesterday's announcement of the partnership with McColl's, which will add around £1bn of annual sales, as an example of how the group is adding meaningful scale.
“We believe that scale and growth are key drivers in food retailing and while Morrisons still lacks scale, it is delivering growth and building volumes through partnerships and its move into wholesaling. This combined with a strong management team, a successful sales based turnaround and further potential to improve its retail offer, lead us to upgrade Morrisons to Hold,” HSBC said. Previously it had a “reduce” recommendation on the stock.
Based on discounted cash flow projections, the target price has been raised to 240p from 190p, on the back of higher profit forecasts, improved cash flow and lower risk.
Wm Morrison Supermarkets PLC (LON:MRW) currently trades at around 244p.
HSBC said the deal to supply McColl's estate of around 1,300 convenience stores and 350 newsagents strengthens Morrisons' strategic position and allows assets to be sweated higher; McColl's stores will be supplied from Morrisons' depots.
“At the same time it gives Morrisons greater access to the growing convenience market (at low risk) and gives the company added momentum, which in turn will help it in supplier negotiations. And all without any additional capex,” HSBC notes.