Analysts at Jefferies upgraded supermarket Sainsbury’s from ‘hold’ to ‘buy’ on Monday after taking a fresh look at general retailers in the UK.
Jefferies said it had “fractionally” trimmed estimates for Sainsbury’s for the year ahead as it opted to take “a more cautious view” on Argos sales pressures and a slightly greater loss of share within a more inflationary grocery market.
The bank, which stood by its 300.0p target price on the stock, noted that its estimates for the group were now broadly in line with consensus estimates at £719.0m.
Jefferies said it had noted the extent to which current valuation levels de-risk shareholders from meaningful downside, with Sainsbury’s stock troughing at around 12x following a mid-teens rebasing in mid-term earnings expectations back in the midst of the global financial crisis.
However, Jefferies said the critical difference in the business between now and then was “a vastly improved capital structure”, which major balance sheet strengthening seeing adjusted leverage reduce from 3.7x to a likely current level of around 3x.
Analysts at Berenberg lowered their target price on Pets At Home from 570.0p to 510.0p on Monday despite acknowledging that the group had an “exceptional” 2022 trading year.
Berenberg, which reiterated its ‘buy’ rating on the stock, noted sales momentum at Pets At Home remained strong, with the rate of new pet sign-ups still elevated and the company’s strategic initiatives delivering like-for-like growth across its retail and veterinarian businesses.
“We recently hosted the Pets management team at our UK Corporate Conference. A key takeaway was that momentum in the Retail business remains strong, with the Puppy & Kitten Club still recruiting c20k new members per week. While this is down from ‘peak pet’ at c30k per week in H1 2022, it is still over double the rate we would expect from a flat pet population. Given that club members typically spend c25% more per year than regular customers, with better engagement across different verticals and channels, this continued momentum supports not only our near-term forecasts but also the company’s longer-term growth outlook,” said Berenberg.
The German bank also noted that when looking to 2023, it expects demand to remain robust but for cost pressures to hold back margin expansion as the firm prioritises protecting its prices to drive market share gains.
“Despite a positive demand outlook, Pets’ cost base is coming under pressure. Specifically, for FY 2023, management expects a c90% yoy increase in its energy bill and a c90% yoy increase in freight costs. Overall, we expect mid-single-digit cost inflation to be partially offset by relatively small price increases and cost-saving initiatives (such as rent reductions), resulting in a 4.4% decrease to our FY 2023 EBITDA estimate or a c90bp decrease to our EBITDA margin forecast,” said Berenberg.
Goldman Sachs downgraded advertising giant WPP on Monday to ‘neutral’ from ‘buy’ as it took a look at internet and media stocks.
The bank cut its 2022/23 earnings per share estimates by 7% on average for its coverage, reflecting its economists’ lower macro forecasts, strategists’ views on a stagflationary environment, the latest company data points and FX changes.
“We also run a downside scenario based on global GDP 3pp below our economists’ current forecasts, which implies an 11% further cut to our 2022E EPS on average,” GS said.
“In a stagflationary environment, we view Pearson, Relx and UMG as the most attractive buy-rated stocks in our sector. We also upgrade Adevinta and Schibsted to buy and downgrade Pro7, RTL and WPP to neutral, and Stroeer to sell.”