Broker snap: Merrill Lynch cuts Sainsbury

5th Jan 2010 13:08

Merrill Lynch is at a loss to see where the upside is for supermarket chain Sainsbury at its current pricing level, and has cut the stock to 'underperform' from 'neutral'.With the shares trading at 13.3 times projected fiscal 2010/11 earnings as against Tesco's projected earnings multiple of 13.7 and Morrison's 11.9, Sainsbury's shares do not strike the broker as particularly good value.On the plus side, the broker says there is limited downside, thanks to asset backing and the continued presence on the shareholder register of the Qatar Investment Philosophy will keep bid speculation bubbling.'The story the shares crave, one of improving margins, remains on hold whilst the group integrates new space... until that space matures, group returns are likely to remain modest,' Merrill Lynch predicts.The broker has a price target of 335p for the stock, based on a 2010 sector price/earnings ratio of 13.5. 'The risks to our price objective on the upside are the emergence of a bid for the group or better than expected trading. On the downside, the main risks are a tougher consumer environment or response to JS' accelerated capex [capital expenditure] plans than we presently predict or a negative impact from the pension scheme that, gross, represents c60 percent of the market capitalisation,' Merrill analyst Andrew Gwynn.