ShoreCap upgrades Sainsbury to 'hold' on valuation grounds

Analysts at ShoreCap raised their recommendation on Sainsbury's shares from 'sell' to 'hold' on valuation grounds, but shied away from recommending a 'buy' following the recent loss of Argos Sainsbury boss, John Rogers, and the likelihood of a flat medium-term earnings trajectory for the grocer.

On the upside, changing hands on a just 10.6 times their estimated earnings for the year to March 2020 and an enterprise value-to-earnings before interest, taxes, depreciation and amortisaton of 4.1, now was the correct moment for an upgrade.

As well, there was a small increase in confidence in the grocer's ability to delivr on profits in the short-term.

Furthermore, plans to reduce net debt by £750.0m over the current year meant that the payout would be "more secure, visible and so sustainable."

However, the loss of Rogers to WPP meant that management would have to do without someone of "considerable intellect, talent and experience".

The analysts were also "nervous" about the grocer's ability to rebuild its second-half profits via the investment that it carried out in the first six months of the year.

"Is the prospect of flat medium-term earnings a reason to Buy the shares?," they mused out loud.

"Maybe falling markets could make Sainsbury's shares more interesting?"