RBC Capital starts Sainsbury’s at ‘outperform’, Tesco at ‘sector perform’

In particular, RBC said it sees significant industry growth from premium food and loyalty.

It started coverage of Sainsbury’s at ‘outperform’ with a 300p price target. RBC said the supermarket chain has made good progress in resetting its price/value proposition in recent years, which has supported a more than 0.5pp gain in market share in the last two years.

"We are encouraged by its focus on its food offer, which we think could support further low single digit percentage market share gains in the medium term," it said.

In particular, RBC said it sees an opportunity for Sainsbury’s as it rebalances its store estate to showcase more of its food offer.

It noted that only 15% of stores carry the full food range and Sainsbury’s is reallocating around 300,000 square ft of space away from white space and general merchandise towards food over the next three years.

"This should help to better showcase the range and we think should allow SBRY to capture a higher share of primary shops (i.e. big weekly food shops)," it said.

RBC also pointed out that Sainsbury’s has a strong track record of cost efficiencies, having generated more than £1bn of cost savings over the last three years.

"We expect a similar level of efficiency in the coming 3 years, from range efficiencies and supply chain productivity," it said. "We note an interesting opportunity from Retail Media, which it projects will contribute an additional £100mn of profit by FY27."

RBC forecasts around 30 basis points of margin accretion across the next three years and expects return on capital employed to reach just over 12% by 2026, up from 11% currently.

Finally, RBC said the valuation looks undemanding, with Sainsbury’s is currently trading at circa 10x CY25 estimated price-to-earnings, slightly below its historical average and at a discount to grocery peers.

"This looks undemanding to us, given SBRY’s potential to take further share and expand its margin," it said.

"The business remains cash generative, and leverage is well controlled (towards the lower end of SBRY’s 2.4-3.0x net debt/EBITDA target corridor), so we see potential for additional cash returns to continue," it said, hence the initiation at ‘outperform’.

RBC initiated coverage of Tesco with a ‘sector perform’ rating and 375p price target. It said Tesco is a "well-run" food retailer and its successful business model is evidenced in its market leading position (circa 28% market share) and operating margin of more than 4%.

"We think Tesco has been well positioned to capture share across the last couple of years, given its strong focus on value," RBC said.

"However, we see potential for the likes of Asda and Morrisons to trade more competitively in 2025, under new management teams.

"Therefore, further share gain may be more difficult to come by."

RBC said it reckons Tesco has a good business in Booker and sees potential for further growth in Booker’s retail and catering operations, as it invests in greater capacity. However, it noted that Best Food Logistics remains a drag, given weakness in some areas of the fast-food market.

"We think market conditions have improved for Central Europe (circa 6% of sales), but we expect margin recovery to be a gradual process," it added.

RBC said the valuation looks fair at current levels.

"In the long term, we think Tesco’s strong track record of cost control and opportunity for additional revenue from the existing cost base (through Retail Media or TSCO’s new marketplace initiative) should lead to improvements in profitability.

"The shares have performed well, up circa 22% in the last year and Tesco is currently trading at circa 12x CY25e P/E, broadly in line with its historic average. In our view this looks fair for a well-managed business, with a strong market share."