Sainsbury’s, ABF Cut to Sell, Next Raised to Buy at Morgan Stanley

Morgan Stanley reshuffled its ratings on some major UK retailers in a note this week, downgrading Sainsbury (LON: SBRY) and Associated British Foods (LON: ABF) to “Underweight” while upgrading Next plc (LON: NXY) to “Overweight,” citing varying degrees of resilience and risk amid a challenging economic environment.

Sainsbury, the UK’s second-largest supermarket chain, was cut from “Equal-Weight” to “Underweight” with the price target lowered from 281p to 276p.

Morgan Stanley's analysts highlighted concerns about the weakening disposable income of UK households, which could lead to reduced spending. 

The investment bank said its new UK household cash flows model shows disposable spending power “is set to decelerate meaningfully,” suggesting that Sainsbury's may struggle to maintain its market position amid a widening gap between strong and weak performers in the European food retail sector.

Associated British Foods, which owns the discount fashion retailer Primark, was downgraded to “Underweight” from “Equal-Weight” with a lowered price target of 1,900p, down from 2,550p. 

Morgan Stanley cited concerns over Primark’s vulnerability to macroeconomic risks in the UK, increasing competition from online retailers, and margin pressures from rising costs and necessary investments.  

Earlier this week, Citi also cut ABF’s rating, citing concerns over Primark's outlook and growing competition.

In contrast, Next plc has been upgraded from “Equal-Weight” to “Overweight,” with a revised price target of 10,800p, up from 10,400p. Morgan Stanley's Grace Smalley described Next as a “port in a storm,” praising its strong track record and defensiveness in an uncertain UK market. 

The firm favours Next for its ability to navigate the current economic challenges with robust financial health and operational resilience.

Overall, Morgan Stanley said it  prefers defensive or high-quality names within UK retail “with strong track records amid the uncertain UK backdrop.”