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FTSE hit by slide in mining shares but Sainsbury boosted by upgrade

Discussion in 'Market News' started by Lily, Apr 22, 2016.

  1. Lily

    Lily Forum Member

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    Metal price fall undermines commodity sector but supermarkets climb

    Leading shares are ending the week on a downbeat note, with mining shares dragging the market lower.

    But supermarkets are bucking the trend, with Sainsbury up 5.6p to 294.4p as Deutsche Bank moved from hold to buy and lifted its target price from 265p to 325p, citing the benefits of the purchase of Argos owner Home Retail. But the bank cut its rating on Morrisons from hold to sell to little effect, with the shares up 2.5p to 193.7p.

    We factor in the expected accretion from the Home Retail Group acquisition and increase our price target 23% from 265p to 325p. In our view, investors are reluctant to factor in this earnings accretion due to execution risk. We also show that Sainsbury’s has achieved the greatest reduction in the level of promotions of the Big 4, over the past 18 months. We think this can contribute to a better margin trend. On 13 times consensus 2016 PE, Sainsbury’s share price already reflects downside risk to near term earnings. In combination with a 3.5% dividend yield, we see 15% return potential. With risk/reward skewed to the upside, we upgrade from hold to buy.

    The Dow Jones non ferrous metals index took a pummelling yesterday, finishing around 7% lower and this is certainly weighing on sentiment amongst the miners this morning.

    We turned cautious on housebuilders in November citing stretched valuation and our fears of margin pressure. The shares have underperformed with Brexit and prime London the main culprits. Margin pressure remains a threat and not all Brexit risks are priced in, but valuation is much more accommodating. We remain more cautious than most but see little downside in the sector now. We upgrade Barratt and Persimmon to hold, leaving only Taylor Wimpey at sell.

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