LONDON (ShareCast) - (Sharecast News) - Berenberg has upped its rating on supermarket chain Wm Morrison, arguing that it stands to benefit from the proposed merger between rivals J Sainsbury and Asda.
The bank, which previously had a 'hold' rating on the stock, said the tie up between Sainsbury's and Asda could see all three listed UK food retailers - Tesco, Sainsbury's and Morrisons - become "very appealing equity investments".

But it argued that the deal would materially improve the investment case the most for Morrisons. "We identify Morrisons as the primary beneficiary of store disposals - around 15% EPS accretion - and upgrade the stock to 'buy'," it said.

The £7.3bn merger was announced last April. The Competition and Markets Authority is currently investigating the potential impact on shoppers and suppliers and is due to announce its findings shortly.

Berenberg believes it is "unlikely" the CMA will block the deal on competition grounds. But it could still insist on the disposal of up to 180 stores, with rivals such as Morrisons poised to snap up.

"Sainsbury's, and Asda's-owner Walmart, have very strong financial and strategic incentives to complete the deal," the bank argued. "As a result, some stores could be sold at a significant discount to market prices.

"We identify Waitrose and Morrisons as the key beneficiaries of store disposals, [as] eligible buyers for 65% and 35% of stores respectively."

It continued: "Morrisons is already at around a 3% organic growth stock, with a strong balance sheet, providing a sustainable 6% dividend yield and 8% EPS CAGR over the next three years.

"Our only concern is valuation. However, after account for disposals accretion, Morrisons provides at 19% total shareholder return and valuation becomes appealing."

Industry data released on Tuesday showed that Morrisons' sales increased 0.4% in the 12 weeks to 27 January, although its market share fell by the same degree to 10.6%.

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