Exane upgrades Sainsbury's to 'outperform'

Following a sell-side group meeting with the company’s chief financial officer and detailed work on the Sainsbury’s and Argos store estates, Exane has revised its central synergy expectation up to £160m from £120m.

Exane pointed to much greater, more relevant store overlap than envisaged, noting that around 175 of Sainsbury’s stores are in the same postal district of an Argos located on a retail park or in a shopping centre.

A further 150+ Argos stores are near a Sainsbury’s on the high street, it said.

“With greater proximity and similar ‘shopping missions’, the scope to transfer sales from a closed Argos store to a Sainsbury is much greater than previously understood. This explains Sainsbury’s confidence on revenue synergies.”

Exane said the shares have fallen 3% since the announcement of a possible bid, in contrast to a rise of around 20-25% in Tesco and Morrison shares.

“It may be impinged by a recovering Tesco and sports an underlying (EBITDAR) margin higher than its peers, but the combination with Argos offers additional profit potential, a use for surplus retail space, and further differentiation to Sainsbury’s offer,” the bank said.

“As the market comes to better-understand the benefits of an Argos deal, we expect Sainsbury’s lowly valued equity will outperform.”

At 0905 GMT, Sainsbury’s shares were up 2.4% to 255.70p.