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Investing.com -- RBC Capital Markets said J Sainsbury PLC’s potential divestment of Argos would sharpen the group’s focus on food, where it has built a stronger position in recent years.
The brokerage noted that talks with JD.com over a possible Argos sale have ended, but the approach underscored that the business is non-core.
RBC analysts said profitability at Argos remains low, with operating margins near 1%, even though Sainsbury’s has reduced fixed costs and improved integration.
By comparison, the food division has delivered steadier progress that has been masked by Argos’s weaker returns.
Argos, bought for £1.4 billion in 2016 through the Home Retail Group acquisition, generates about £4 billion in annual sales, or 11% of group revenue.
RBC said a sale would likely result in a low single-digit percentage dilution in group profit but would improve margins and earnings consistency.
Argos’s holding company was last valued at £344 million and carries a pension deficit of roughly £100 million, factors that may weigh on any deal.
Sainsbury’s shares closed at 307.20p, with RBC maintaining an “outperform” rating and a 315p price target. At that level, the stock would trade at about 14 times 2025 estimated earnings.
The shares currently trade at roughly 12.5 times 2026 estimated earnings, in the middle of their historical range but at a wider-than-usual discount to Tesco, according to RBC. The brokerage also flagged an ordinary dividend yield of about 5%.
The price target is based on a discounted cash flow model assuming a 10-year sales compound annual growth rate of about 2%, a terminal operating margin of 3%, a weighted average cost of capital of 8%, and a terminal growth rate of 0.25%.
RBC said Sainsbury’s strong track record of cost savings, a resilient balance sheet, and cash generation should support continued shareholder returns.
It added that expanding the “Taste the Difference” range and curating general merchandise could further lift market share.
RBC also pointed to risks from low operating margins in food retail, cost inflation, greater competition, weather impacts, supplier relationships, and food safety standards.