HSBC reiterates 'reduce' on Sainsbury's after trading update

J Sainsbury was on the back foot on Thursday as HSBC reiterated a ‘reduce’ rating but raised its target price to 205p from 185p following the supermarket’s third quarter trading update.

The company on Wednesday reported total group sales for the 15 weeks to 7 January rose 0.8%, with group like-for-like sales up 1.0% as weak LFL growth from the supermarkets business of 0.1% was offset by a 4% gain from recently acquired Argos.

HSBC said the total sales and Sainsbury’s sales growth were broadly in line with expectations. “The surprise was 4% LFL growth from Argos vs consensus of 1% and came despite disruption and increased competition,” the bank said.

While Argos did well, HSBC stressed that the core supermarket chain is key and remains under pressure.

The bank also warned that Sainsbury’s faces further competition from its recovering rival Tesco.

“As Tesco continues to recover it is likely to win more sales back from Sainsbury than any other retailer. Sainsbury lacks scale compared to Tesco and will find it harder to compete as Tesco utilises its scale more effectively,” HSBC said.

“We continue to believe that in the long term Argos is in a weak position and will prove a distraction to the core business. Sainsbury needs a strong food business.”

HSBC updated its forecasts on pre-tax profits for fiscal year 2016/17 to £570m from £560m to reflect Sainsbury’s guidance of £573m. The bank raised its target price to 205p from 185p to reflect the profit increase and a reduction in the beta, a measure of volatility, to 1.3 from 1.5.

Shares fell 1.31% to 257.97p at 0932 GMT.