Nomura cuts Sainsbury's target price ahead of Argos bid deadline

Nomura has cut its price target on Sainsbury's ahead of Friday's bid deadline for Argos owner Home Retail, after an uneventful trading update.

With the grocer's shares having risen to 280p, Nomura calculated that around 50p of that was from the value-creating potential of the Argos deal, assuming the 175p acquisition price that the February cash-and-shares offer now represents.

Although 175p made sense when Sainsbury was the only bidder, the gatecrashing of the bid by Steinhoff International means the FSTE 100 supermarket group must either give away some of that 50p by enhancing its offer, or walk away from the deal entirely and give away all of it. Ahead of the 18 March offer deadline, and after an

Nomura has adjusted its short-term model to take two scenarios into account.

The new 250p target price assumes a 50% chance that Sainsbury’s bid sweetens to 200p, including a £900m rights issue so it can match the Steinhoff's all-cash offer, knocking the shares back to 265p, and a 50% chance that Sainsbury is outbid by Steinhoff, sending them down to 230p.

"We do not claim that the rally in Sainsbury shares has been driven entirely by Argos; indeed, there is a chance the market reacts positively if Sainsbury withdraws from the race, at first.

"But we think we know that our fundamental valuation will end up below 280p in either scenario," analysts wrote.

Sainsbury's fundamentals remain solid for Nomura, having been the most resilient of the Big four grocers through recent years but it sees limited scope for Sainsbury to relatively surprise on its margin growth in the medium-term.

The fourth quarter trading update on Tuesday omitted any comment on full year margins, which analysts interpret as meaning "major surprises versus consensus should not be expected on 4 May".