Synergies from Sainsbury’s agreed purchase of Asda from Walmart could be as high as £1.5bn, Berenberg analysts said as they raised their price target for the FTSE 100 grocer.
Sainsbury’s management is guiding for £500m of net synergies after disposals and reinvestments from the deal but Berenberg said this number was “very conservative”. The benefits of buying Asda from Walmart could add up to a gross £1.5bn, the analysts said. Berenberg reiterated its ‘buy’ rating on Sainsbury’s and increased its price target to 369p from 300p.
“The net synergies number does not include any return on synergy reinvestments, which could drive a virtuous cycle of growth’ the analysts said. “We also see significant e-commerce opportunities in both food and non-food, as the group benefits from Walmart’s technology and innovation with limited requirement for capex.”
Despite this, Sainsbury’s shares trade at a 20-30% discount to the sector and deserve a rerating, Berenberg said.
Risks related to the deal from a potential competition inquiry are overestimated, the analysts said. Space in the industry has grown by 40% since 2008 and there is minimal regional overlap between the two brands to bother the Competition and Markets Authority. The maximum hit to earnings from disposing of stores is £250m – a fraction of the gross synergy opportunity, Berenberg said.
With Pearson's management showing signs of increasing confidence as the first quarter drew to a close, analysts at Credit Suisse saw reason to believe that the FTSE 100 educational publisher can deliver stronger earnings this year than first envisaged.
In a conference call with management, confidence was especially apparent over the North American higher education market, with chief executive John Fallon going so far as to highlight Pearson's "very good competitive performance" in the higher education adoption season, which lasts until mid-June.
Fallon said he was "very comfortable" with the way the company was performing as he talked about "doing exceptionally well" in the sell-through of Pearson products in colleges taking Digital Direct Access, which has the additional benefit of reducing demand for Open Educational Resources in those colleges.
"To us, this suggests that the company is not concerned about the potential impact of the Cengage Unlimited competing product line," Credit Suisse said in its Wednesday note.
For both Pearson's growth and core divisions, the outlook for modest growth was reiterated by management, but CS did note that, as the first quarter was a shorter trading period, it was "hard to extrapolate the trends" moving forward.
CS maintained its 'neutral' rating on Pearson and upped its price target on the group from 700p to 850p.
First-half results from tobacco giant Imperial Brands impressed RBC Capital Markets, which saw management "doing the right thing" and the shares "too cheap".
Perusing the interim numbers that showed tobacco sales volumes and net revenue at constant currencies down 2% in the six months to 31 March, analysts at RBC said their "worst fears have not arisen", with volume and revenue declines within expected ranges.
While volume and revenue declined, it was felt to be a solid performance: "Things seems to be going to plan for the first time in a while at Imperial," RBC said.
RBC noted management is "doing the right things to fix its top line" as although market share in key markets is comparable to competitors, the portfolio has been "too fragmented" so that the low penetration of the growth brands has been acting as a "substantial drag" on organic growth.
With the shares trading for just over 10 times calendar 2019 EPS, a 48% discount to the sector, with a 9.3% free cash flow yield and 7.8% dividend yield, RBC think Imperial is "too cheap". An 'outperform' rating and £28 price target were reiterated.
The UK's fifth largest motor retailer Vertu Motors was seen as a more favourable prospect by Canaccord Genuity after the AIM-quoted firm posted a rise in pre-tax profits in its most recent trading year, despite seeing a slight decrease in revenues.
Vertu's full-year pre-tax profits came in at £28.6m, bang in-line with expectations re-based by its board back in January, amid increasing pressure on new car sales and used car margins that led to a 0.9% dip in revenues.
Key to the Canadian broker's improved assessment of the company, was chief executive Robert Forrester's pleasure with the group's post-period performance in "all key areas" during March and April, leaving him and the board confident for the coming full year.
"This is a cautious management team, so when the outlook statement mentions that 'the prospects for the UK new car market are likely to be more favourable' and 'the outlook for used cars is strong' along with 'after-sales prospects are positive,' the market should take note," said Sanjay Vidyarthi, Canaccord's analyst.
While Vertu's year-to-date profitability was behind the previous year, Canaccord said trends were "encouraging" and that comparatives for the remainder of the year were set to ease, leading it to keep its 2019 pre-tax profit forecast of £26.6m unchanged.
At the same time as reiterating its 'buy' stance on Vertu, Canaccord also chose to up its target price on the firm, saying "There are no material changes to our earnings estimates, but we raise our TP from 57p to 66p."
"We maintain our view that this is a high-quality asset and management has built solid foundations - financial, strategic and cultural - to deliver long-term earnings growth and cash generation," he added.
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