Analysts at Jefferies downgraded supermarket giant Sainsbury’s from ‘buy’ to ‘hold’ on Monday, stating that while they remained “upbeat” on UK grocers, there appeared to be better value elsewhere.
Jefferies said positive forecast momentum and outsized initial Covid-19 concerns had helped Sainsbury’s over 50% UK sector outperformance over the past nine months.
However, the analysts noted that the Argos-driven earnings upgrades had “largely run their course”, with Sainsbury’s now on an eight-year price-to-earnings “relative peak” and a 26% premium on a foreign currency basis.
“We remain upbeat on UK food retailers as we reflect on near trough valuations at a time of strong mid-term earnings visibility (with 22/23 benefitting from a full Covid costs recovery and profit pools rebuild), as encapsulated by peak real yields offered by Tesco/WM Morrison relative to 10yr Gilts,” said Jefferies, which kept its 280.0p price target on the stock unchanged.
Liberum struck an upbeat note on the UK housebuilding sector on Monday, upgrading its stance on shares of Taylor Wimpey as it said recent updates confirmed trading has strengthened in April/May and house price inflation has spread to the new build sector.
The broker upgraded Taylor Wimpey to ‘buy’ from ‘hold’ and lifted the price target to 185.0p from 180.0p to reflect the improved outlook.
“It is the sector performance laggard (down 24% since February 2020 against the sector down 13%) and offers a compelling valuation on 1.46x 2021E book given its returns and distributions,” Liberum said. “For 2021E we estimate a return on equity (post-tax) of 14% and a 5% dividend yield (rising to 8% in 2022E).”
The shares appear to have underperformed as a result of fire safety cost concerns, which the broker reckons are overdone.
“Its £40.0m cladding provision taken in 2020 and the £125.0m fire safety provision taken in 2021 equates to around 4% of its 2020 net assets,” it noted.
