Citi upgrades Morrisons on potential gain from Sasda merger

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.

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.