Sainsbury’s gets double-downgraded by Berenberg ahead of full-year results

Analysts at Berenberg double-downgraded Sainsbury's from a ‘buy’ rating to ‘sell’ ahead its full-year results on Thursday 30 April.

The Hamburg-based investment bank also lowered its target price for the stock to 170p a share, implying a potential downside of -15% based on Sainsbury’s closing at 200p on Tuesday.

Despite downgrading its assessment of Sainsbury’s, analysts at Berenberg opted to lift Morrisons rating from ‘hold’ to ‘buy’ and raised its target price for the rival supermarket chain to 213p.

Morrisons closed at 188p on Tuesday.

‘While our analysis indicates that the grocers can achieve absolute profit growth at their retail businesses, and the UK grocers are best positioned through the business rates 'holiday', we expect them to mitigate these benefits as all the grocers in our coverage would face external pressures if they demonstrated exceptional profit growth,’ Berenberg said in a note to investors.

The discrepancy between Berenberg’s outlook for the two supermarkets is based on it expecting Sainsbury’s non-food retail and banking units dragging down its overall performance.

‘Their unsecured lending exposure will have to book significant loan losses and may require substantial capital injections in order to maintain sufficient liquidity,’ the bank said.

Morrisons is better placed than Sainsbury’s as a result, with it benefitting from increased food demand and its relatively strong balance sheet enabling it to maintain its dividend amid the Covid-19 crisis, Berenberg added.

Ocado remains preferred stock, says Berenberg

Online food delivery service provider, Ocado, remains the bank’s top rated stock in the sector, with more grocers in need of adopting automated online solutions in order to stop margin dilution occurring, according to its analysts.

‘In our view, Ocado is primed to capitalise on this and we expect it to secure more deals following the crisis,’ the bank said.

Berenberg also remains optimistic about buy-rated Tesco, with its adoption of automated online solutions key in helping it minimise margin dilution, while its wholesale business will likely be a key beneficiary of sector consolidation and offers it significant scope for capital returns.

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