Shore Capital downgrades Sainsbury to 'sell' with profits set to sink

27th Nov 2014 11:11

The share price of UK supermarket chain J Sainsbury was under pressure on Thursday after Shore Capital downgraded its rating from 'hold' to 'sell', saying investors should expect a "material contraction in profitability".The broker said it sees "few attractions in holding Sainsbury's shares". It expects a 30% "reset" in earnings per share (EPS) and is forecasting three years of declines in Sainsbury's profits and dividends.Shore Capital acknowledged that the group's first-half results released two weeks ago were better than feared, but the outcome of the strategic review sparked concerns about the outlook.Analysts Clive Black and Darren Shirley said the review gave "tough but transparent guidance" and believes management should be given credit for their realistic assessment of the UK grocery market.However, they said: "[The review] revealed there was a major sting in the tail as management lowered medium-term guidance for like-for-like sales, new space and margins, whilst taking action to protect the balance sheet through lower capital expenditure and dividend payments."As a result, Sainsbury's confirmed our fears that it is set for a period of sustained EPS decline, as management transfers value from shareholders to customers to protect its medium- to long-term prospects," they said.Meanwhile, the much-anticipated price/margin reset at Tesco is also causing some uncertainty, the broker said.The stock was trading 1.3% lower at 235.9p by 11:27.