Berenberg gave a boost to Wm Morrison Supermarkets PLC (LON:MRW) on Tuesday, upgrading its rating for the food retailer to ‘buy’ from ‘hold’, arguing that it stands to benefit from the proposed merger between rivals J Sainsbury plc (LON:SBRY) and Walmart Inc (NYSE:WMT) owned Asda.
In a note to clients, the German bank’s analysts said the planned tie-up between Sainsbury's and Asda could see all three listed UK food retailers – Tesco PLC (LON:TSCO), Sainsbury's and Morrisons - become "very appealing equity investments".
READ: WM Morrison falls as it warns of ‘change in consumer behaviour’ despite sales rise over Christmas
But they argued that the £7.3bn merger deal, announced last April but which is currently being investigated by the Competition and Markets Authority, would materially improve the investment case the most for Morrisons.
The analysts believe it is "unlikely" the CMA will block the deal on competition grounds but it could still insist on the disposal of up to 180 stores, which rivals are poised to snap up.
They identify Morrisons as the primary beneficiary of such store disposals, with around 15% earnings accretion expected as some stores could be sold at a significant discount to market prices.
The analysts noted: "Morrisons is already at around a 3% organic growth stock, with a strong balance sheet, providing a sustainable 6% dividend yield and 8% EPS CAGR over the next three years.
"Our only concern is valuation. However, after account for disposals accretion, Morrisons provides at 19% total shareholder return and valuation becomes appealing."
Berenberg raised its target price for Morrisons to 285p from 250p, with the shares adding 2% in afternoon trading at 244.25p.