ShoreCap maintains 'sell' on Sainsbury's as Tesco revitalises

6th May 2015 11:17

Annual underlying profits at Sainsbury's beat analysts' forecasts on Wednesday, but Shore Capital still recommended investors to 'sell' shares of the grocery giant.The broker said it is worried that the supermarket has not yet reached then end of its downgrade cycle, especially on expectation of a "revitalising Tesco".Underlying pre-tax profit fell 14.7% over the 52 weeks to 14 March 2015 to £681m, ahead of ShoreCap's £655m prediction. Meanwhile, the full-year dividend was slashed by 23.7% to 13.2p, above the broker's 12.3p estimate.Sainsbury's strategy outlined to the market in November 2014 means the company is "adapting to market realities and so seeking to tough it out in a very challenging market where price and gross margin investment are at the fore", ShoreCap said.In this environment, the broker said that free cash generation and cash conservation is the key priority.ShoreCap said that Sainsbury's pension responsibility, debt and operating lease commitments, albeit substantial, should all be met due to lower capital expenditure and easier dividend payments."[However,] this is expected by Shore to constrain the company over the medium term, a view that is manifested in our caution on the group's stock performance," the broker said."That caution reflects, to a considerable extent, our uncertainty and worry that Sainsbury has not yet reached the end of its downgrade cycle, in particular, we are concerned that a revitalising Tesco may hit Sainsbury's trading patterns, respecting the fact that Sainsbury's is not standing still into this headwind."The stock was down 3.4% at 265.6p by 11:14.