Sainsbury offers a "stable investment" in struggling industry, says Shore Capital

11th Jun 2014 08:15

The 1.1% fall in like-for-like (LFL) retail sales excluding fuel at J Sainsbury was "very much in line with our expectations", according to Shore Capital which retained a 'hold' rating for the stock on Wednesday.The broker said that despite the weak outlook for the industry, Sainsbury offers a "relatively stable investment proposition", compared with its other two UK-listed rivals Tesco and Wm Morrison which are both rated as 'sells'.Analysts Clive Black and Darren Shirley said that by Sainsbury's own standards, the 1.1% fall in LFL sales is a "disappointing outcome", despite it coming in towards the better end of their own forecast range for a LFL decline of -1% to -1.5%."However, against a backdrop of demonstrably weak industry sales - Sainsbury talked of the weakest quarter in a decade - the outcome is relatively sound when compared to Morrison's 7.1% fall and Tesco UK's 4.0% fall."They said they were happy to keep a neutral stance on Sainsbury even though the backdrop for the industry is not favourable, owing to increasing margin pressure and falling LFL sales."The stock trade's at only a modest premium to its historic net asset value/share (305p), which is robust in our view given the strong skew of freehold assets to the more prosperous south & east of England," Black and Shirley said."Sainsbury has attractive income credentials, with a forecast yield of 5.3% covered 1.75x by earnings, and 96% by post all capex cash flow (pre-property disposals)."They also said that the cash cover of dividends should improve over the medium term. Meanwhile, its shareholder structure "offers downside protection".The market gave a positive reaction to the results on Wednesday, with the share price up 3.8% at 342.4p by 08:30.BC