Broker snap: Sainsbury's Q2 'solid' but valuation fair, says Jefferies

2nd Oct 2013 10:04

Jefferies said that Sainsbury has delivered "another solid quarter" as expected but still maintained its 'hold' recommendation for the supermarket stock.The broker maintained its 385p target price, which is calculated by using a 20% discount to its net present value of 480p per share. This is equal to the stock trading at 12 times calendar-2014 earnings, which it said is "fair" given the limited scope for forecast changes on the back of Wednesday's trading update.The stock was down 1.74% at 383.4p in morning trade.Sainsbury's like-for-like (LFL) sales increased by 2% in the second quarter, the company said, ahead of Jefferies' forecast for a 1.9% rise. This "certainly looks impressive both in an industry context and relative to strong trading this time last year", the broker said.The company said that consumer behaviour remains little change with wage inflation (around 1%) still well below food inflation (3%). However, the broker said that Sainsbury's demographic/regional exposure "makes the core of its customer base a little less cash constrained than that of peers".As for the firm's future investments, Jefferies said that there were few indications on a conference call with management that Sainsbury may follow up on the drastic capital expenditure reductions seen by others in the sector. "Management is confident that its commitment to a convenience and more meaningful non-food business is rational (and we agree on both counts). "We are more concerned that the continued roll-out of destination stores in Sainsbury's white spots may endanger industry progress on space rationalisation (and indeed we are unsure whether these store opportunities truly reflect a consumer need on the ground). We believe an improved cashflow profile versus reduced new space [earnings] delivery would be a positive valuation trade. We will see at the November 13th interims."BC