Broker snap: Citi downgrades Sainsbury and Morrison in sector review

24th Jun 2013 10:17

Citigroup has cut its ratings for supermarket peers Sainsbury and Morrison as part of its reviewed stance on the European food retail sector.In a research report titled 'From Ritz to the Rubble', the broker explains that sector earnings in real terms are now 12% lower than a decade ago and are expected to fall further as space growth diminishes and macro-economic conditions remain harsh."Investing in the sector on the basis of easy monetary conditions and low high-yield bond yields no longer seems, in our opinion, to make so much sense," said analysts Alastair Johnston and Pradeep Pratti.Citi now has 'buy' ratings on just four companies across the European sector, namely Ahold, Booker, Colruyt and Jeronimo Martins.While Morrsion remains the broker's sector preference in UK food retail, its rating has been downgraded from 'buy' to 'neutral'. Citi said that its greatest concern is management's "direction of travel", after the company decided to cave in to market calls for a cash return, instead of pursuing market-share gains by large-scale capacity additions or moves into the convenience industry.Sainsbury meanwhile has been cut from 'neutral' to 'sell' with the broker saying: "In a more supportive credit environment, Sainsbury looked more attractive by virtue of its large real estate holdings and low price-to-earnings multiple. The environment has changed."Tesco is already rated a 'sell'."All of the companies assigned 'sell' recommendations have found it difficult to deliver sustained operating cash flow growth despite sometimes substantial capital inputs."