Shore Cap slashes Sainsbury's earnings and dividend forecasts
Sainsbury's mixed second-quarter results and plans for a no-stone-unturned strategic review have led broker Shore Capital to downgrade its earnings and dividend forecasts, and an "uncomfortable hold" stance.
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16:40 25/04/24
The company guided to a 2% fall in like-for-like sales, but did not change its full year profit guidance, with consensus currently at circa £710m.
Shore's head of research, Clive Black, slashed his expectations for Sainsbury's full-year 2015 retail earnings before interest and tax by 16%, forecasting a 17% pre-tax profit fall to £645m and earnings per share (EPS) of 25.1p.
The company also followed recent pricing initiatives with news that it has reconfigured its 'Brand Match' promotion to just compare prices with Asda, no longer matching Tesco, which has a much larger own-brand offer.
Alongside results, Coupe revealed plans for a wide-ranging strategic review, with details of his plan to be provided with Sainsbury's interim results on 12 November, which has put the wind up investors that the dividend could be cut.
"With respect to one of the key features of Sainsbury's investment case, its dividend, we harbour growing concerns about its sustainability at current levels with recent trading trends and profit trajectories," said Black.
He said he believed it would take "a lot of work" to produce the level of free cash flow to support the group's current dividend stream, including central cost cuts and a further reduction in capital expenditure.
Hence, for 2016 Black has forecast a payout of 11.25p, implying a yield of 4.6%, a cut of around 35%, but admitted he may being overaggressive.
"Should Sainsbury's recent actions on pricing represent a turn of the corner in the recent sales and market share trajectory of the business then the dividend will indeed become more secure and the stock can be expected to bounce back to or near the underlying net asset value of the group, which is currently 305p," he added.
Either way, he concluded that Sainsbury's shares at current levels "feel like a poor risk-return equation", despite its "deserved" de-rating after a poor year so far to current "undemanding valuation ratios".