Brewin Dolphin says 'buy' Sainsbury despite capex and pricing niggles

7th May 2014 13:56

After Sainsbury's stubbornly refused to enter the new supermarket price war, Brewin Dolphin analyst Nicla Di Palma said the grocer might have settled on the best strategy. Despite a few 'controversies' in the results and on a conference call with analysts, Di Palma issued a 'buy' recommendation and said Sainsbury has "got its positioning and products right". After consensus estimates significantly downgraded Sainsbury's dividend, with expectations for a 3.5% cut next year, Di Palma said management stated on the call that "it has a dividend policy based on increasing the dividend year-on-year with a cover target of two times in the medium term".Despite the current competitive environment, analysts were surprised by the fact that the company did not announce any investment in pricing itself. Instead, Chief Executive Justin King stated Sainsbury was "ready to react" if it sees any meaningful changes in like-for-like sales. "This will obviously take some time as there is a delay in sales reaction after a change in price," Di Palma said. Another "controversy" was about capital expenditure, with Sainsbury guiding to flat capex this year and after that targeting less than 3% of sales. "Whilst this is less than in the past, we believe capex should be cut substantially more," the analyst said. "Also in this case, it is a matter of waiting and seeing whether the new CEO Michael Coupe will move away from this strategy once he officially takes over the helm in July."Kantar data released on Wednesday showed Sainsbury lost some market share at the expense of the discounters and premium players, although was still performing better than Morrison and Tesco. The Brewin analyst said there was a sense that management was being stubborn. "Whilst these sound like negatives, the reality is that Sainsbury has got its positioning and products right and pricing and capital expenditure are more easily fixed than other factors. It remains to be seen what the new CEO will do and what the results of the price war will be. "Sainsbury's stubbornness on not reducing prices might still turn out to be the best strategy."OH