Thursday, 8 May 2014

Sainsbury - Final Results

Last month I posted after the final results for Tesco -  sales flat, profits and earnings down and no increase in the full year dividend.

Sainsbury reported full year results yesterday (link via Investegate) - sales increased 2.8% to £26.3m, underlying profits were up 5.3% to 798m and earnings were up 6.5% to 32.8p per share supporting a proposed lifting of the full year dividend to 17.3p covered 1.9x (last yr 16.7p).

These impressive results did little however to convince Mr. Market that all was well with this supermarket and after a brief surge in early trading, the share price slumped back. The sector as a whole is under pressure and despite the impressive results, Sainsbury is finding it difficult to overcome this negative sentiment.

Experts predict a bitter price war will escalate, as discounters Aldi and Lidl drive up the ante. In his final full-year update before stepping down in July, chief executive Justin King was upbeat however and said that Sainsbury's was no longer vulnerable to a price war. "The assorted profit warnings of our competitors mean it’s no longer true," he said. "Their price investments have largely been PR rather than audited announcements. We are sharper on price than we’ve ever been."

Most effort went into the convenience store opening programme was stepped up in the year with 91 new convenience stores which brought in annual sales of over £1.8 billion.

In the past five years, the Company’s property portfolio has grown by £4.5 billion, and its market value is now £12bn.  Activity during the year delivered property profits of £52 million and, over five years they have raised £1.2bn through disposals, realising property profits of over £335m.

I think it may be worth pointing out that at current share price level of £3.30, SBRY is valued at around £6.3bn. Private equity firms looking to gain exposure to UK real estate could, for example, buy for circa £8.5 billion and get their property assets at a very large discount, with the retail business thrown in for free.  It is worth noting that the Qataris still retain a 26% stake from their attempted takeover of the business for £6.00 per share in 2007.

UK food retailers are becoming more appealing on valuation grounds and I believe SBRYs is possibly the top pick in the sector given their recent performance. I have considered topping up my current holding as the share price has come back around 15% in recent months however, as I also hold Tesco, I think any additional weighting in the sector would be a little too much so have resisted the temptation.

I am happy to continue holding - be good to hear what others think about supermarkets. Leave a comment below if you have a view.

2 comments:

  1. Dear diy investor,

    I have recently added your blog to my RSS feed and just wanted to say how much I appreciate your articles.

    If you were looking for a growth stock, then the returns on equity on supermarkets might be too low. There attraction, I believe lies in the high yield and over time there will be some recovery in share prices and they are a darn sight better than fixed interest securities.

    Regards
    Louis Gunn

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  2. Hi Louis,

    Thanks for your comment and good to hear you enjoy the blog.

    I agree, supermarkets are probably well past the growth stages but hopefully the steadily increasing dividends (well not Tesco at present!) will help to increase the capital values over the longer term - meantime, enjoy the 5% yield.

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