Broker snap: Sainsbury on undemanding valuation

18th Jun 2010 10:40

Wednesday's trading update from Sainsbury was in line with expectations, prompting Charles Stanley to reiterate its advice to clients to accumulate the shares.With Sainsbury management saying it is comfortable with consensus profit before forecasts of £655m for the current year Charles Stanley is leaving its earnings estimates for the current year and next year unchanged. Sainsbury trades on a projected 2011 price/earnings (P/E) ratio of 12.5 based on the broker's forecast of 26.0p earnings per share, and this falls to 11.4 on 2012's projected earnings of 28.5p per share. As such, the shares trade at a premium to Tesco (2011 P/E of 12.1) and Morrisons (P/E of 11.3) which Charles Stanley attributes to superior asset backing - Sainsbury's net asset value per share is estimated at around 370p - and the takeover premium generated by the Qatar Investment Authority's 26% stake."The UK food retail sector has experienced some weakness in recent weeks, reflecting softness in the wider market and concerns over slowing like-for-like sales growth. Sentiment towards the sector should gradually improve in the second half of 2010, however, as food price inflation picks up and like-for-like sales growth begins to improve," analyst Sam Hart predicts."We expect the group to deliver at least high single-digit growth in underlying earnings and dividends in each of the next three years. New space and expansion into the convenience segment are expected to be key drivers. Significant potential exists to raise operating margin from the current industry lagging 3.4%," Hart adds.On the basis of its sound balance sheet and the asset backing, Charles Stanley thinks the valuation is undemanding and advises clients to accumulate the shares.