Merrill Lynch downgrades Morrisons ahead of results

9th Jan 2017 12:53

(ShareCast News) - Bank of America Merrill Lynch downgraded Wm Morrison Supermarkets to 'underperform' ahead of the supermarket group's post-Christmas trading update, as it sees "risk skewed to the downside for earnings".The first of the big four UK supermarkets to post its January update, Morrison is due to report on Tuesday, with analysts generally cautious about the sector and of mixed opinions about the potential winners and losers. Merrill, which held it target price at 220p, said it had a "very cautious" view on the UK food retail market for 2017 as not only do the bank's economists predict UK private consumption and national growth will slow post Brexit, analysts also expect UK retailers to import in high levels of food inflation, making it difficult for retailers to pass through at the same pace to shoppers.Furthermore, the structural shift of recent year away from the Big Four is still a trend, as implied by the evolution of the market."Morrison is not immune to such a context and the slight sales recovery of 2016 may ease in 2017. The new cost-saving opportunities flagged at the H1 results will continue to fuel the ongoing price reset, but we cannot expect positive development of the retail operating margin."Merrill analysts see potential from the wholesale arm, but are not quite sure yet, while the group's vertical integration as a food producer and grocer is the "key opportunity" but by acting as a supplier Morrisons may be setting up Amazon as a "structural and disruptive competitor" in the foreseeable future.Morrison's sales and profits recovery has seen its shares move to a premium to its peers but this is now all priced in.