Analysts at Jefferies claim they are more confident that J Sainsbury PLC (LON:SBRY) can deliver to market expectations over the medium-term, even after the recent run-up in the shares.
The broker rates Sainsbury as a ‘buy’ with a 280p price target, suggesting some 14% upside to the current market price of 244p.
“Generally accepted wisdom dictates that stable grocers’ FCs cannot be mispriced by investors to an extent that a 30% rally in the equity base still leaves plenty of upside on the table," the broker said.
“It is with this frame of mind that we reviewed our buy on SBRY.
“We analysed more closely the Argos profit base given the potentially sizeable post-COVID profit unwind and, in the longer term, the structural benefits to SBRY’s profits from fully integrating the business into the core supermarket stores.”
Jefferies noted that, on its model, it takes Sainsbury three years to absorb Argos store into the supermarket’s business (except for 100 ‘flagship’ locations) to save £35mln per year and that Argos earnings (EBIT) will move to around £160mln.
“Our group profit before tax estimates for 21/22 and 22/23 look well supported, notwithstanding the Argos reduction from the 20/21 profit peak; this is because of the major hit from COVID costs to the core food business; we estimate ex-Argos group retail EBIT of £870mln in 19/20 to come in at £792mln in 21/22, supporting our view for an overall group PBT growth of c.8% vs 19/20,” Jefferies added.