Sainsbury 8217 s shares capped as bid war looms despite strong sales

Whether or not Sainsbury’s goes ahead with its takeover of Argos operator Home Retail Group, the M&A foray has already come at a great cost. […]

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By :  ,  Financial Analyst

Whether or not Sainsbury’s goes ahead with its takeover of Argos operator Home Retail Group, the M&A foray has already come at a great cost.


Best and worst

It’s well-known that UK supermarket shares have not exactly had a rip roaring few years.

But Sainsbury’s stock has extended the notable underperformance of its ‘Big 3’ rivals that we pointed out last year.

That’s despite Sainsbury’s UK sales growth having nosed ahead of Tesco’s, Morrisons’ and Asda’s for the last several months, including in February.

Grocery researcher Kantar Worldpanel said on Tuesday Sainsbury’s was the only one of Britain’s Big 4 (including unlisted Asda) to increase overall sales.

It was the eighth straight month of such retail outperformance, Kantar said.


True, Sainsbury’s own overall share of the market remained flat, but as we’ve seen, that has been less important—for share prices—in the Supermarket Stakes than stronger sales performance, no matter how marginal.



Margin of error

Sales at the firm, which is considering making a higher takeover proposal for Argos owner Home Retail Group rose 0.5% year-on-year in the 12 weeks to 28th February, according to Kantar.

The UK grocery No.2’s market share stayed at 16.8%, whilst Britain’s overall grocery market in total sales volume terms was up 0.5%.

The problem has been that prices have stagnated at best.

At ‘worst’ (from the perspective of industry investors) prices are declining.

It’s difficult to get an accurate picture of price trends because of marginal variance around weak-to-zero price growth at supermarkets over the last few years.

February’s 1.6% lower year-on-year total outcome, according to Kantar, could easily have been influenced by marginal erroneous skew.

We assume any like-for-like growth seen at UK supermarkets over the last year has been negligible.

(And yes, all have experienced at least some growth, but it’s largely been patchy.)



Home hunting

Either way, in our view, it has been Sainsbury’s pursuit of Home Retail Group—regardless of the merit of the tie-up—that has probably capped its stock so far in 2016.

We think the odds of the supermarket realising dreams of increased vertical integration have improved, now that HRG has disposed of slow-growing Homebase, keeping Argos.

But ironically, Sainsbury’s interest in Home has still extended the supermarket stock’s underperformance of its big rivals that we noted last year.




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Both of you shut up

After all, Sainsbury’s has offered £1.3bn in cash and shares for a proposed deal that investors have reacted coolly to.

Not to mention that stakes were raised last month by the wildcard entrance of Afro-Germanic group Steinhoff International, which has been given a statutory ‘put-up-or-shut-up’ date of 18th March.

The UK’s takeover regulator also extended Sainsbury’s deadline to the same date.

Sainsbury’s hasn’t helped its stock by saying last week that it ‘could waive Home Retail board approval pre-conditions’ if necessary.

In other words, it could ‘go hostile’.


Which might translate to ‘Bring it’—in less corporate speak.


The statement puts Sainsbury’s on a bid war footing, despite the group having pledged in January not to overpay for Home.

The prospect of a sustainable stock price recovery would be pushed further into the future if Sainsbury’s failed to live up to its pledge, in spirit at least.



On a technical basis, Sainsbury’s shares continue to be challenged by long-term resistance close to and marginally above 282p.

This clear pattern has been in evidence since the sharp sell-off between mid-September and mid-October 2014.

Sainsbury’s shares do not seem to have definitively recovered from their apparent inability to sustain prices above their 200-day moving average (DMA) either.

Given the observably magnetic attraction of that threshold, it is an important watch point in the event that current support at a 127.2% (264p) retracement gives way.

Completion of the extension (AB/CD pattern) would also correspond with the 38.2% interval (equating to 245.8p) of Sainsbury’s erratic tumble between 5th and 26th January.

If Sainsbury’s ‘fated’ 200-DMA does let the shares through again (on the downside) which the line seems prone to do, and 245.8p goes too, another test of the 2016 low at 227p could be on the cards.

Momentum tilts towards the bearish case right now (Stochastic sub-chart).





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