Citi upgrades Morrisons on potential gain from Sasda merger
Morrison (Wm) Supermarkets
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16:55 26/10/21
Morrisons could benefit from the merger of Sainsbury's and Asda, Citi analysts believe, leading them to upgrade their rating on the Bradford-based supermarket group.
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Citi's "base case" forecasts the Sasda merger to drive almost 60% pro-forma earnings per share accretion for Sainsbury's, but synergies are expected to be "tempered" by a predicted remedy process from the competition regulator of around 200 store disposals.
This provides a potential opportunity for both Morrisons and Tesco to acquire stores, Morrisons "benefiting from more opportunity and from a lower base".
A "mid-case" remedy scenario sees Morrisons potentially buy between 48 and 108 remedy stores, with a mid-case of 78 stores representing 20% of existing selling space.
Assuming Morrisons takes on additional costs and achieves up to 1% synergies, this mid-case scenario drives circa 30% pro forma EPS accretion, before any reinvestment into the offer.
"While we view Sainsbury’s shares as offering the best risk/reward from the potential merger, we recognize the benefit which might also accrue to Morrison’s," the analysts said, accordingly upgrading their rating to 'neutral' with a 255p target price.