Food retailers, Sainsbury – update 01

Sainsbury- update 01

30 Apr 2018

one year on from the last report

This morning we see the Full Year Unaudited results for the 52 weeks to 10 March 2018

Going into this we observe:

  • Market cap(in millions)* £ 5,905.65
  • pe = 15.22 (mar 2017)

The data from the report shows:

  • Return on capital employed = 8.4% (lower than last yr)
  • Group revenue (ex VAT, inc fuel) £28,456m (2018) v £26,224m (2017)
  • Profit before tax £409m (2018) v £503m (2017)
  • Basic earnings per share 13.3p(2018) v 17.5p (2017)

=> new pe would be 20.7x
>>> not particularly good

However, at the same time, over the weekend, softening the poor data above the following is shown:

Sainsbury’s and Asda have agreed to a merger to create Britain’s largest grocer. Asda will be valued at £7.3 billion, with Walmart holding 42% of the share capital. The US firm will also receive £2.98 billion in cash. Both brands are to be retained, but benefits of greater scale and the opening of new Argos branches in Asda are expected to generate upwards of £500 million in synergies.

The market already knows this:

The retail sector is going through significant and rapid change, as customer shopping habits continue to evolve. This has led to increased competition across grocery, general merchandise and clothing, as customers seek ever greater value, choice and convenience. Bringing Sainsbury’s and Asda together will result in a more competitive and more resilient business that will be better able to invest in price, quality, range and the technology to create more flexible ways for customers to shop.

The details:

he Combination will result in Walmart holding 42 per cent of the issued share capital of the Combined Business and receiving £2.975 billion of cash (subject to customary completion adjustments), valuing Asda at approximately £7.3 billion on a debt-free, cash-free and pension-free basis. At the time of completion of the Combination, Walmart will not hold more than 29.9 per cent of the total voting rights in the Combined Business.

 

Summary:

Although the unaudited results indicate below par prognosis, it may be worth holding shares into the above given that the benefits (in particular, promised synergies) are likely to outweigh declines. Revenues grow, but margins and profits shrink, so mergers in this space are inevitable in the long term.

 

1 May 2018 market split:


Share 12 wks – 22/04/18 Share Share Change
12 wks – 23/04/17 £M %* £M %* %
Total Grocers 26,301 100 26,830 100 2.00%
Total Multiples 25,788 98 26,359 98.2 2.20%
Tesco 7,257 27.6 7,406 27.6 2.10%
Sainsbury’s 4,252 16.2 4,258 15.9 0.20%
Asda 4,103 15.6 4,161 15.5 1.40%
Morrisons 2,749 10.5 2,810 10.5 2.20%
Aldi 1,808 6.9 1,949 7.3 7.70%
Co-op 1,612 6.1 1,605 6 -0.40%
Waitrose 1,363 5.2 1,366 5.1 0.20%
Lidl 1,317 5 1,437 5.4 9.10%
Ocado 295 1.1 332 1.2 12.70%
Iceland 561 2.1 562 2.1 0.20%
Other Multiples 471 1.8 473 1.8 0.50%
Symbols & Independents 513 2 471 1.8 -8.30%

 

 

 

Below are the contents of the previous report (Food retailers, Sainsbury):

 

The retail & food sector has been tough over the past few years & this is set to continue.

Today [3rd May 2017], Sainsburys reported its Preliminary Results for the 52 weeks to 11 March 2017 in which the company claims “a pivotal year for the Sainsbury’s Group“.

However, words are words, with the matters of fact being the bottom line. Profit before tax was £503 mill (for the 2016/2017 year) compared to the £548 mill (for the 2016/2016 year). That is a fall of 8.2%. Furthermore, the basic earnings per share fell from 23.9 pence to 17.5 pence (a 26.8% drop), leaving the company trading as a multiple of 15 x earnings (based on todays price of ~ £2.60).

Whilst the earnings multiple is not in itself excessive relative to comparable stocks nor the index (the FTSE 100 is 25 x & the midd 250 is 18 x), one has to consider the economic environment that the company is operating in. The primary headwind appears to be the growth of the discounters (such as Lidl & Aldi) which are continuously taking market share from the top 4 according to Kantar data.

Kantar data between Jan 2016 and Apr 2017

Sainsburys (as opposed to the other three, Tesco, Asda & Morrisons)  has made a move in terms of diversifying with the purchase of Argos. The company reports it has opened 59 Argos Digital stores in Sainsbury’s supermarkets and they are performing well. This comes with an £160 million EBITDA synergy target by Mar 2019. The company has also reduced it’s net debt from £1,826m to £1,477m, so if these factors play out according to plan, the credit metrics of the company will certainly look robust although it should be noted that a 1% loss of market share would more than offset the synergies and they could even be seen as a distraction by some shareholders.

The final dividend is 6.6 pence per share, bringing the full year dividend to 10.2 pence per share, reflecting a dividend policy of 2.0x cover. Whilst not amazing, the dividend yield is approximately 4% with current numbers which is inline with other “reliable” dividend paying stocks.

5 pillars

The company sets out 5 pillars in it’s November 2014 strategy. These are as follows:

  1. knowing its customers better than anyone else
  2. great products and services at fair prices
  3. being there for its customers whenever and wherever
  4. colleagues making the difference
  5. its values making it different

To date, it is questionable as to if Sainsburys has exceeded any of its peer group in any of the above.

4 priorities

The company goes on further to state Four key priorities:

  1. Further enhance its differentiated food proposition
  2. Grow General Merchandise and Clothing and deliver synergies
  3. Diversify and grow Sainsbury’s Bank
  4. Continue cost savings and maintain balance sheet strength

Metrics have been set for these and there is observable evidence that some of the goals will be met.

Summary

How should shareholders take the announcement ?

The answer is, hold, wait and see. Whilst the profits were down (on the previous year), the company still offers good value relative to its peer group and if the company can meet it’s targets, this could present reasonable upside.

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