Market Report: Sainsbury's hit by Goldman divi blow
Friday 18 January 2013
Supermarkets have been hit by the horsemeat burger scandal this week, which was followed by equal helpings of outrage and humour. But today it was Goldman Sachs' switch to sell that sent Sainsbury's share price south. Goldman's analysts are more focused on dividend cover than burger blunders.
They claim Sainsbury's limited free cash flow leaves dividends "uncovered", meaning it thinks Sainsbury's is at risk of not being able to continue to pay out the same level of dividend in future. They expect "very limited free cash flow generation" as sales growth slows and expect its trading to continue to "deteriorate as competition intensifies".
Sainsbury's is in fact the second-most indebted supermarket in Europe, they say, and Goldman dislikes the stock so much it has added it to its conviction sell list as it has the largest "unfunded dividend" across the banks' entire coverage of companies.
It gives the stock a 295p share price target and the shares slipped 1.9p to 326.1p.
Sainsbury's fall was even more evident as it was in contrast to the gains achieved by the wider market. The benchmark index is up more than 4.5 per cent since the beginning of the year and hit a four-and-a-half-year high. It was 22.05 points better at 6154.41.
The US S&P 500 hit a five-year high the day before and analysts expected the bullish sentiment to continue after signs that China, the world's second-largest economy, is in turnaround mode.
Miners benefited from the Chinese rebound hopes and steel maker Evraz topped the blue-chip index, up 13p to 304.4p, despite reporting a 5 per cent drop in production.
After Rio Tinto fell on Thursday following the change of guard which saw the ousting of chief executive Tom Albanese, today the shares recovered 63p to 3,502.5p as investors digested the news of its new chief executive.
Engineer Meggitt added 6.2p to 437.2p after analysts at Barclays upped their share price target to 520p.
Over on the mid-tier index, oil explorer Ophir Energy was keeping Britain's richest man happy when energy experts at Nomura gave it the thumbs up.
Indian steel tycoon and Queens Park Rangers shareholder Lakshmi Mittal backs African-focused Ophir and scribes at Nomura gave the group a "double upgrade" to buy, which bumped the share price up more than 2 per cent. Ophir added 13p to 540p, as Nomura's oil team upped their rating from reduce and gave it a share price target of 750p.
Some shareholders in Ophir decided to sell the shares recently and take profit following a 70 per cent jump during 2012.
The company hasn't been without issues – drilling for oil in Africa is hardly risk-free – and its shares suffered a setback last autumn when its joint-venture partner, BG Group, up 17.5p to 1,114p, handed back a rig in Tanzania, which led some to question the outlook for Ophir.
Drilling for oil in Africa has been more straightforward recently than trying to find it in Iraq's Kurdistan.
In the latest war of words between Iraq's national government and the Kurdistan Regional Government, the latter defended its crude oil trade with Turkey as "constitutional".
Iraq's oil minister has warned it may sue companies that are exporting crude from Kurdistan via Turkey.
But the KRG has rejected Iraq's deal with BP to develop the disputed Kirkuk oilfield and maintains that exports of oil via Turkey should go ahead.
Genel Energy, up 20p to 800p after reporting an encouraging update today, became the first company to export oil directly from Kurdistan this month despite the threats from Baghdad.
Experts think the Kurdistan oilfields have great potential and a number of explorers have begun working in the region despite the political turmoil.
FTSE 250-listed Afren, which has begun operating in the area, lost 2.3p to 135p ahead of its results on Monday. AIM-listed Gulf Keystone Petroleum, down 4.5p to 217p, is developing the lucrative Shaikan Block there.
Meanwhile, BP edged down 0.65p to 460.35p on the benchmark table.
Engineer Kentz Corporation said the outlook for 2013 was strong when it announced a pre-close trading update ahead of its results for the year. It said it had a strong pipeline of projects and its shares topped the mid-cap index, up 35.2p to 424.2p.
Back on AIM, celebrity jeweller Theo Fennell's shares jumped 2.5p to 12p. Last week it issued a profit warning after disappointing Christmas sales.
But it has been the target of private-equity group EME Capital, which last week was given a fourth extension, now February 22, to make an offer for the London-based group.
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