Morrisons downgraded amid threat of Asda resurgence
MORRISONS’ investment rating has been cut from ‘sell’ to ‘neutral’ by Goldman Sachs on the back of fears that Asda will disrupt the market now it has a new turnaround team in place.
Goldman believes its current valuation for Morrisons does not reflect market risks faced by the supermarket, which closed on 195.5p per share yesterday.
It said that the Bradford-based grocer had seen a 34% rise in share price since the beginning of 2016, but the broker said: “Though we continue to believe Morrisons should be rewarded for its commitment to price investments, cost cutting and cash generation, we believe this is more than reflected in the stock price and see no room in consensus for the worsening conditions we forecast in the UK grocery market.”
Goldman said it did not expect a “negative surprise” in Morrisons’ first half results and that it has seen momentum in like-for-like sales and balance sheet improvement. It did say that current valuations reflected “best-case scenarios” and with market risks heightening it was prudent to be more realistic.
The broke said: “We believe the threat from Asda doing something aggressive to disrupt the UK grocery market is now at its highest. It has recently appointed a new CEO and LFL sales are the worst on record. We believe any meaningful response from Asda would negatively impact industry margins.”
Asda recently suffered from its worst-ever quarterly sales drop of 7.5% following a period of transition with new chief executive Sean Clarke coming in to rehaul the business on behalf of Asda’s parent company Walmart.
Both Yorkshire supermarkets are scrambling for the advantage, with Morrisons taking on former and Asda selling off its photo division to focus on its sales slump.
