Broker tips: Bunzl, National Grid, Sainsbury

RBC updated its estimates on Bunzl to reflect recently completed M&A activity and the latest guidance from the company, with earnings per share estimates rising by 6-7% over the "next couple of years", driving a roughly 4% uplift to the target price.

The Canadian bank stated that despite Bunzl's "long track record" of M&A-driven EPS growth, it believes limited underlying organic growth constraints the valuation and it sees the firm's heavy B2B2C exposure as "relatively unattractive" versus wider business services peers under current macro conditions.

"Bunzl's very high conversion ratio (EBITA/gross profit) and return on average operating capital at 30% and >45% respectively in FY23 are impressive on the one hand but, on the other hand, when considered in the context of BNZL's longer-term history of organic EBITA margin contraction and thus essentially zero real organic EBITA growth, suggest a business that is structurally over-earning," said RBC Capital.

"We think this constrains the terminal multiple investors should be willing to pay for the business, as Porter's Five Forces inevitably assert themselves. In the meantime, the business remains dependent on recycling earnings into M&A to drive earnings growth. We currently prefer stocks at similar valuations with stronger long-term organic growth dynamics."

JPMorgan Cazenove added National Grid to its 'analyst focus list' on Tuesday, noting that the company was well positioned to benefit from value-accretive networks growth at an attractive valuation, and with questions around the balance sheet answered after a £7bn equity raise.

JPM noted that National Grid now expects to deliver 10% asset growth to 2029, with a rebased dividend growing in line with CPIH.

"We see the valuation as attractive with 35% potential upside to our sum-of-the-parts based March 2026 price target of 1,200p," the bank said.

JPM, which rates the stock at 'overweight', said its bull case scenario implies 70% upside, with the stock currently trading around its bear case scenario.

"We believe that the shares are trading below fair value because of election uncertainty, and because of regulatory uncertainty in UK Electricity Transmission - we should begin to see clarity from the regulator’s methodology decision due next week," it said.

Jefferies has reiterated a 'buy' rating on Sainsbury after the supermarket chain's trading update on Tuesday, predicting a recovery in top-line performance after a first-quarter sales slowdown disappointed the market.

Total retail sales excluding fuel increased by 2.6% year-on-year in the 16 weeks to 22 June, with like-for-like sales rising by 2.7%. However, this was down from the 4.8% LFL growth seen in the fourth quarter of the previous financial year and 7.4% growth in the third.

Grocery sales increased by a "market-beating" 4.8% during the quarter, but general merchandise and clothing sales dropped by 4.3% on last year, while sales at Argos fell 6.2%.

"An exceptionally strong grocery performance at SBRY in Q1 was diluted by a more downbeat delivery in the general merchandise businesses, particularly Argos. This should represent the trough, which feels well understood by the market given the shares' recent underperformance," Jefferies said.

"Sunnier weather in recent weeks should underpin sequential acceleration, with the chief drivers through the rest of the year an improving consumer environment and an easing comp."