J.Sainsbury - Not such sweet Nectar

J. Sainsbury: Perhaps Mike Coupe is unlucky in taking over from the successful Justin King at a time when the food retail industry is in turmoil. Or perhaps he is lucky, in that he take over at a time when the industry behemoth Tesco is face down in the dirt. Either way, he faces a rapidly changing market and the spectre of food deflation. In its own right, Sainsbury’s is well placed within the industry having fewer over-spaced stores, better non-food expansion potential (especially clothing), a good loyalty programme (using Nectar), established home delivery and a growing high street convenience presence. A nagging concern is whether they fall between two stools, lacking the M&S/Waitrose cache whilst clearly not being a discounter. Perhaps the jv to re-introduce discount fascia Netto to the UK acknowledges this portfolio vulnerability? For the half year like-for-like sales (ex-fuel) were down 2.1%, with a similar figure being guided for the second half. Alongside this, margins will be under pressure leading to profits being down year on year. Capex is of the order of £750m, roughly the size of forecast EBIT. Meanwhile, last year’s dividend of 17.3p cost around £330m and at 240p delivered a yield of 7.2%. That dividend was covered almost twice by historic earnings, but cover this year and next is likely to be nearer 1.3x. However, in the absence of a sharp recovery in industry profitability, the total cost of dividend and capex may prove tough for the Board to justify. An NAV near 300p and the 25.99% Qatar Investment Authority stake provide under-pinning, but as a comfort blanket that may prove a bit thin in chilly winds. The brave may feel that the lowly share price fully reflects the industry upheaval, but for those seeking income growth driven returns there doesn’t seem to be any rush. (3^rd October 2014)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about.

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