Analysts at Swiss investment bank UBS have upgraded FTSE 100 supermarket WM Morrison Supermarkets PLC (LON:MRW) to ‘buy’ from ’neutral’ as a slowdown in the expansion of discount retailers eased competitive pressures.
The bank said that discount competitors such as Aldi had been a “key source of Morrisons’ switching losses (inc. loyal customers) over recent years”, but added that Aldi store openings had slowed sharply, down over 50% year-on-year, in the first half of 2018 and was thus reducing the pressure on Morrisons to keep reinvesting.
READ: Barclays thinks Morrisons could actually benefit from Asda-Sainsbury merger
As a result of the reduced competitive pressure, UBS said that Morrisons’ management were now in a position to allow “more of its ‘self-help’ efficiencies to drop-through to margin”, forecasting 25 base percentage point growth in the company’s EBIT margins in its 2019 and 2020 financial years.
Analysts added that the upcoming merger between Morrison rivals Sainsbury’s (LON:SBRY) and currently Walmart-owned Asda as “good news for Morrisons” on a 12-24 month view.
“The Sainsbury's-Asda merger will hand those parties material synergy firepower and Morrisons does compete with Asda for similar shopper missions. However, its likely 2+ years before Asda shoppers will see lower prices and, ahead of this, prior tail-risks of an Asda 'margin reset' seem low” analysts said.
UBS isn’t the first broker to tout the Sainsbury’s-Asda merger as a good thing for Morrisons. Back in May British investment bank Barclays PLC (LON:BARC) said the prospect of a merger made them “less concerned at the near-term risk of a step-up in [expansion] aggression from ASDA” which could have reduced Morrisons market share.
The bank also lifted its target price to 300p from 225p, adding that the stock would be “attractive for more risk-averse investors” due to a strong balance sheet which includes 85% of freehold estate and a pension surplus in addition to a cash generative portfolio with a free cash flow yield of 8%.
In late-morning trading Monday, Morrisons shares were up 1.9% at 261.6p.