Broker tips: Sainsbury, oil companies, BSkyB

18th Jun 2010 13:06

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 tax 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."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%," Charles Stanley analyst Sam Hart said.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.Nomura Securities has picked up on increased mergers and acquisitions activity in the oil sector in recent weeks, with Africa-focused oil and gas company Afren and UK independent oil company Dana both announcing deals this month."Stronger cash flow generation, owing to the higher oil price environment, a narrowing of expectations between buyers and sellers, and better availability of financing, should see this uplift in deal activity sustained into 2H 2010 [second half of 2010], in our view," Nomura analyst Michael Alsford predicts.On the macro level the broker sees oil prices well supported around current levels and expect a strengthening in the macro environment heading into the second half of the year, based on its expectation of improving global oil demand. "The UK E&Ps will also benefit from the continued strength of US dollar versus UK sterling," Nomura notes.Nomura has made some slight modification to its price targets for Cairn (up from 479p to 488p), Premier (up from 1649p to 1671p) and Soco (up from 460p to 466p).Its preferred picks in the sector remain Afren, Premier and Tullow. Views differ on whether shareholders in British Sky Broadcasting (BSkyB) should take the money in the market or hang around for a higher offer from News Corporation.KBC Peel Hunt thinks the shares are worth buying now the company is officially in play as the final offer price "may well come in at over 700p per share". The broker has plumped for a target price halfway between the 700p News Corp has already offered and the 800p price which the independent directors of BSkyB say is the minimum they will accept.Despite the regulatory hurdles, KBC analyst Patrick Yau thinks "that both teams are keen to proceed, with the main point of difference being price."Charles Stanley's Sam Hart also thinks an offer between 700p and 800p range will be made in the fullness of time, but reckons the timescale could be protracted, "given that the terms of the Cooperation Agreement do not expire until the end of 2011."The broker has downgraded the shares from "accumulate" to "hold".