Goldman removes Sainsbury from 'conviction sell' list

Goldman Sachs removed Sainsbury from its ‘conviction sell’ list, keeping at ‘sell’, with a 195p price target.

The bank noted Sainsbury has significantly underperformed UK peers years-to-date, down 6% versus Morrison up 55% and Tesco up 41%.

“Though we remain bearish on the stock, there is no longer more downside to our target price versus other stocks in our coverage. We therefore remove the stock from the conviction list, but with 20% downside we remain sell rated.”

Since being added to the conviction list back on 18 January, 2013, the shares are down 25.6% versus the FTSE World Europe up 25%, due to structural UK grocery market pressures which manifested over the period, GS said.

Goldman said Sainsbury remains the stock it is most bearish on when it comes to risks to earnings estimates.

The bank pointed out that in the food business, it has consistently argued that EBITDAR margins around 100-150 basis points ahead of Morrison and Tesco UK is sustainable, particularly in the context of them driving like-for-like volume growth well ahead of Sainsbury for the first time in over five years.

“We believe further price and/or offer investment will be required to reverse this trend and therefore forecast grocery EBIT margins falling 119 bp FY16-20.”

In addition, it highlighted Sainsbury’s recent acquisition of Argos. GS said that although there are clear synergies from optimising the Argos and Sainsbury store footprints, over the next two years as hedges roll off, the exposure to the US dollar on purchasing at Argos will be a major profitability headwind.

Sainsbury is scheduled to release its first-half earnings on 9 November and Goldman expects to see underlying group EBIT of £316m, down from £366m in the first half a year ago.

At 0938 BST, the shares were up 0.7% to 241.90p.