Numis says 'hold' on Home Retail amid Sainsbury takeover talks

Sales at its Argos brand for the 18 weeks to 2 January dropped 2.2% compared to consensus for a 0.3% increase. A 5% increase in sales at Homebase also missed forecasts for a 5.3% rise.

As a result, the group said annual profits were now set to be at the bottom end of current expectations of £92m-£118m.

The company has been in the sights of supermarket Sainsbury’s in recent months and also announced on 13 January it was in talks to sell off Homebase to an Australian conglomerate

“Another poor performance by Argos over the critical Christmas peak causes a further 12% reduction in group pre-tax profit forecasts,” said Numis analyst Matthew Taylor.

“This makes c.30% downgrades over the past year against a benign retail backdrop, leaving it difficult to mount a convincing defence against any bid from Sainsbury.”

Taylor added that that the proposal to sell Homebase seemed to involve “quite heavy leakage costs and the exit multiple (24% of sales) does not appear overly generous, but would at least leave the remaining group in a very sound financial position”.

“The shares trade on 16x PE to cal-16F, a 10% premium to the sector before the potential dilutive effect of the proposed Homebase disposal.”

Numis recommended a ‘hold’ rating and a target price of 150p.

Shares were trading down 0.45% to 152p at 1047 GMT.