6th Sep 2022 17:51
(Alliance News) - Jefferies painted a bleak picture for the UK retail sector on Tuesday, downgrading various high street stalwarts ahead of "multiplying consumer pain".
Jefferies lowered Primark owner Associated British Foods PLC, B&Q owner Kingfisher PLC and grocers J Sainsbury PLC and Tesco PLC to 'hold' from 'buy'. It cut B&M European Value Retail SA to 'underperform' from 'hold', but maintained Next PLC and Marks & Spencer PLC at 'hold'.
"Having waited for weeks to see European energy markets provide us with a sustainable forecasting base, we now surrender to the weaponisation of European gas prices," Jefferies said.
"The scale of the challenges, despite the upcoming bail-outs, is such that we cannot recommend buying any of the seven stocks in this report."
Rising energy bills have heaped pressure on businesses and consumers and Ofgem's price cap was lifted further last month.
The energy regulator said that the price cap for the average household would increase by 80% to GBP3,549 for the three months starting in October. But experts at energy consultancy Auxilione warned that the cap could double even from that record high by April next year, hitting GBP7,263.
"The two key areas of pain for UK consumers will be utilities costs and mortgage expenditure," Jefferies predicts.
It estimates that at current market prices, energy expenditure will grow from 3.3% of earnings in the 2021-22, to 14% in 2023-2024.
Jefferies added: "Given current market expectations for BoE 6-month and 18-month rates we see housing costs grow from 25% to 27% and 30% over the same period. We assume that the government will largely cover consumers' incremental energy outgoings. But energy costs are set to represent an enduring inflationary headwind via producers."
New Prime Minister Liz Truss said the UK would "ride out the storm" as she prepared a multibillion-pound package to help Britons cope with soaring energy costs.
In her first speech in the role, she acknowledged the economic headwinds facing the country but promised action this week to help with energy bills.
Jefferies added: "Recent statements from politicians suggest that many are starting to grasp the gravity of the challenges ahead. Drastic changes to the regulatory backdrop of the market are being considered. And an ever-increasing resolve to prevent an unprecedented level of economic destruction could have surprising political consequences in the weeks ahead. Our embedding of the current economic reality may prove short-lived. In which case everyone within this group of seven would soar.
"Kingfisher (the most shorted stock within the FTSE All-share) would likely be the biggest potential beneficiary."
Conversely, B&M may struggle in the months ahead, Jefferies predicts. It is the most vulnerable "within a universe that appears destined to a few tough months ahead".
By Eric Cunha; [email protected]
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Related Shares:
AB FoodsSainsbury'sTescoKingfisherB&MNextMarks & Spencer