J Sainsbury PLC (LSE: SBRY)

J Sainsbury PLC (LSE: SBRY) is an FTSE 100 listed retail company that operates through three divisions: Retail-Food, Retail-General Merchandise and Clothing, and Financial Services. This report covers the key recommendation rationale and conclusion for the stock

Key Recommendation Rationale – Sell at GBX 288.00

• Resistance near Current levels: SBRY’s stock price has breached the Resistance (R1) which was stated in the previous report on 14 June 2024 therefore, there can be a possibility of a decline from resistance levels. Considering the market conditions and the price action, it is prudent to exit the stock.
• Declining Segmented Revenue: During Q1 FY25 company’s General Merchandise and Clothing saw improved clothing sales, but weaker seasonal general merchandise sales (-4.3%). Argos experienced a decline in sales by 6.2% due to lower seasonal sales and reduced demand for Consumer Electronics, particularly Gaming, compared to a strong previous period.
• Lower Profitability: Company reported lower gross margins of 7.8% in FY24 against the industry median of 22.2%. Further, the net margin for SBRY also figured lower at 0.4% in FY24 versus the industry median of 1.8%.
• Balance Sheet Risk: When compared to the industry, SBRY reported higher debt-equity ratio of 0.95x during FY24 vs industry median of 0.87x. In addition, the percentage of long-term debt to total capital was 44.5% in FY24 against the industry median of 27.0%.
• Macroeconomic Risk: The market sentiments can remain weak in the short term due to the subdued consumer disposable income, geopolitical tensions, and political risks.

 Valuation Methodology: Price/ Earnings Approach

Share Price Chart  

Conclusion

SBRY is expected to trade at a discount of 1% considering the elevated credit risk exposure, decreasing profitability, declining segmented revenue, and lower liquidity relative to the overall industry. For conducting the valuation, the following peers have been considered: Kitwave Group PLC (LSE: KITW), Associated British Foods PLC (LSE: ABF), and others.

Given its current trading levels, the recent rally in the share price, relative valuation, and risks associated, it is prudent to book profit at the current levels. Hence, a ‘Sell’ recommendation is given on the stock at the closing market price of GBX 288.00, as of 27 August 2024.

Note 1: Past performance is not a reliable indicator of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance level is 27 August 2024. The reference data in this report has been partly sourced from REFINITIV.

Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and/or technical analysis taking into consideration both short-term and long-term scenario.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’

Note 6: Dividend Yield may vary as per the stock price movement.

Technical Indicators Defined: -

Support: A level at which the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest. Support 1 refers to the nearby support level for the stock and if the price breaches the level, then Support 2 may act as the crucial support level for the stock.

Resistance: A level at which the stock prices tend to find resistance when they are rising, and an uptrend may take a pause due to profit booking or selling interest. Resistance 1 refers to the nearby resistance level for the stock and if the price surpasses the level, then Resistance 2 may act as the crucial resistance level for the stock.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.