Sainsbury looks resilient to Macquarie after gravity bites

Macquarie has upgraded its rating on Sainsbury's after the shares fell 13% since interim results last week and the supermarket proved its resilience in a tough market.

With the shares now at a near-historic discount to the sector, the Australian bank lifted its rating to 'neutral' from 'underperform' and its price target to 240p from 190p.

Having earlier in the year argued the supermarket group's £150m of price cuts would not be enough to stem declining sales, Macquarie was pleased to see management upped the investment to £200m.

"We cannot ignore Sainsbury is trading remarkably well in a tough market," it said. "Cost savings are ahead of schedule and we clearly see an upgrade coming on the three-year targets."

With Sainsbury's addressing the price gap more slowly, analysts have reduced their estimate for 2017 price investments, taking its margin for earnings before interest and tax (EBIT) calculation for that year to 2.6% from 2.2% and driving EBIT up 17%.

Macquarie has argued Tesco and Asda are likely to need to get to near a 10% price differential with discounters on their 'core competing basket', while Sainsbury’s slightly more affluent customer base could allow it to operate on 10-15% gap.

"So it is surprising to see the CEO referring to circa 5-10% differential as a benchmark, although it is evident that they do not have a strong view and will be trialling various ideas. Importantly, Sainsbury’s is delivering good volume uplifts on the back of their price cuts already."

The company is on target to deliver £225m of cost savings in the current financial year, up from £200m, with finance director John Rogers confident about the next two years' savings, leading analysts to foresee an upgrade at May's finals.