Broker snap: JPMorgan keeps 'underweight' stance on UK supermarkets

23rd Jan 2014 10:05

Supermarket stocks were trading in the red on Thursday after gloomy comments from JPMorgan Cazenove about the issues and misconceptions surrounding companies' property valuations.The bank reiterated its 'underweight' positions on UK grocers Morrison, Sainsbury and Tesco.Morrison, which owns the freehold of around 90% of its stores, in September suggested one of the possible strands of its strategy review could be to unlock cash from its property estate.Recent proposals by a US hedge fund, which owns stakes in several UK supermarkets, suggested that rather than a sale-and-leaseback move, Morrison should list its property company in order to show its value to the market, keeping a 75% stake.The hedge fund, which apparently owns less than 1% of Morrison, has apparently proposed that both Sainsbury and Tesco would benefit from a similar strategy, citing the precedent set by retailer Loblaw in Canada in December 2012.JPMorgan, however, stressed that Loblaw is a "very different case" and has in fact underperformed the Canadian stock market over the last six months."Property is not a reason to buy the UK grocers, in our view, but rather a reason to sell the stocks," the bank said.It suggested that supermarket property values are linked directly to their profits and the scarcity of planning consents. However, property prices are expected to fall "significantly" with industry profits on the verge of a contraction, planning consents picking up and online growth eroding valuations, the bank said.Meanwhile, JPMorgan said that the property values quoted by the UK grocers are "not realistic": "In our view, as they are based on an extrapolation to the entire network of sale-and-lease back transactions, which can only be applied to a small part of the network before the credit profile of the retailer deteriorates, and on the assumption that their profits and those of the industry will remain high."Morrison fell 1.2% on Thursday morning, while Tesco was trading down 0.5% and Sainsbury dropped 0.8%.BC