Broker tips: Tesco, Bunzl, WPP, Gresham House

Tesco will be the winner with price cuts set to be a major theme for grocers in 2021, Morgan Stanley said as it increased its price target for Tesco shares.

Morgan Stanley's analysts said Tesco had led price deflation in the UK with prices down 0.8% since June. Britain's biggest supermarket has the scale to take advantage of this by agreeing to promotions and rebates with suppliers, they said.

This applies to physical stores, where Tesco has 27% of the market, and online where Tesco's share is 36%, analyst Maria-Laura Adurno said. She reiterated her 'overweight' rating for Tesco shares and increased her price target to 287p from 276p.

Investors are also overlooking cost cuts and market share gains available to Tesco at its Booker wholesale business, Adurno said. She estimated Tesco could save between £340m and £1.7bn on labour, cost of goods and general expenses.

"This could be reinvested in prices and contribute to overall revenue momentum," she wrote in a note to investors. "At the time of its 1H results, Tesco stated that Booker had gained market share and we believe that Booker can sustain this competitive advantage gained during the lockdown given its scale and variety of product sourcing."

Analysts at RBC Capital Markets lowered their target price on distribution group Bunzl from 2,300.0p to 2,200.0p on Thursday to take into account the group's most recent trading update.

RBC Capital said whilst the stock had underperformed of late, other than mergers and acquisitions, it sees few catalysts. However, it stated that the net result was that 2020 forecasts went up, with a bigger Covid-19 product benefit than originally thought, although its previously sub-consensus 2021 forecasts came down 1%.

The Canadian bank said comparatives were "tough" on a relative basis going into 2021 and also noted that the macro environment was likely to remain "weak" in some of Bunzl's end markets.

"With valuation relatively unattractive and with organic growth likely harder to come by going forward, we believe sentiment and momentum will likely remain muted," said the analysts.

RBC also pointed out that M&A opportunities should continue to emerge over time and would also remain "crucial" to the investment story, given its view that longer-term growth and margins remained under "some structural and mix pressures".

"We continue to be cautious and remain at 'underperform', believing there are better defensive growth stocks in the sector and within the distributors specifically," concluded RBC.

Bank of America upgraded WPP from 'underperform' to 'neutral' and increased its price target on the stock from 570.0p to 830.0p after the advertising company set out new growth targets.

WPP said on Thursday it would cut costs by £600m a year by 2025 and reinvest two-thirds of the savings in the business. It also plans to spend £200m-£400m a year on acquisitions to catch up with the shift to digital advertising.

The FTSE 100 group also said it was aiming for an operating margin of 15.5% to 16% by 2023, higher than its previous target of at least 15%. WPP's fourth-quarter revenue decline of 6.7% is tracking better than expected, the analysts said.

Bank of America said WPP's targets were "very clear" and stated it now sees 3-5% earnings per share upgrades on the back of more bullish margin targets and a better 2020 full-year out-turn.

The analysts highlighted that they believe the ad market will recover strongly but visibility on execution was low and added that agencies were underperforming the wider market.

BofA added WPP was also "implicitly admitting" that the "good old days" in the communication vertical were over and acquisition ambitions are an end to the simplification message of the past two years.

Analysts at Jefferies reiterated their 'buy' stance for shares of alternative asset manager Gresham House following news that it had acquired Irish asset manager Appian.

The €330.0m of assets under management the acquisition would bring with it would take Gresham's AuM to a total of £3.6bn and add €400,000 of normalised annual earnings before interest, taxes, depreciation and amortisation.

In addition to that, Jefferies noted that it would also boost Gresham's medium-term return on invested capital past 15%.

Looking past the numbers, the purchase of Appian would also extend the firm's reach in the Republic of Ireland and the European Union, giving it an international presence, Jefferies argued.

"Appian already manages forestry and other real assets, as well as having a smaller companies listed equity product, so the capability set is also well-matched," added Jefferies.