Sainsbury (J): Much of the bad stuff
in these 52-week results, to 14th March 2015, was already known or
suspected. Not least probably by Justin King as he headed undefeated towards
the pavilion, waving his bat at the crowd. So, as with Tesco, the real focus is
on what happens next? For a start Sainsbury’s looks less wounded. These results
showed underlying sales down 0.9%, with LFLs down 1.9%, which is painful but
surmountable. Underlying pre-tax profits were down 14.7%, with eps down 19.5%
to 26.4p. Within the £117m drop in pre-tax profits, to £681m, the net cost to
profits of cutting prices was £40m, (with £110m predicted for the current year)
and the retail operating margin fell from 3.65% to 3.07%. Meanwhile, Sainsbury’s
Bank grew its profits by 17% to £62m, but the cost of transitioning to full operational
independence has increased from £80m to £120m. The full year dividend was cut
to 13.2p, with dividend cover now locked in at that 2x level and the return on
capital was down to 9.7% from 11.3%. The theme of protecting the balance sheet
runs through these numbers, with that dividend cut, and reduced planned capex
targeted at £500m-£550m in each or the next three years against £947m in the
year just reported. A £900m property write down (to £11.1bn) plus a £628m
impairment and onerous contract charge are painful, but less bloody than at
Tesco with their huge ‘noughties’ land bank and disgraced profit recognition
policies. Net debt at year-end of £2,343m was down £41m and is well supported
by EBITDA of £782m, whilst the official (adjusted) net debt to EBITDAR figure
is given as 4.1x.
For a long time the worry was that if Tesco launched a price war, off
its (claimed) near 5% historical margins, then Sainsbury’s and the other majors
would be trampled. However, Tesco no longer has the muscle to know that it
could win such a battle. In addition Sainsbury’s does not have to wrestle with
a problematic overseas empire or to worry about a grossly over-spaced UK
portfolio. The new CEO, Mike Coupe, has many problems, they just are less
daunting than for Tesco’s new team. The rise of the discounters has been a
major thorn for the majors and Sainsbury’s is in the early stages of a joint
venture to re-launch Netto in the UK, as a response to Aldi and Lidl. The
venture is in its very early stages with the first five stores opening late
last year and ten more in the pipeline. Only time will tell whether this is a
fig leaf or a strategic master-stroke.
So, consensus for FY2016 looks like a further drop to 21.5p, which at
today’s soggy 265p is a PE of 12.3x. This isn’t too dear if we are near the
bottom of the profit cycle, with FY2017 also at 21.5p. Of course the new
dividend policy means this would be another dividend cut to 10.75p, for a yield
of 4.1%. So, clearly a fail on dividend growth criteria but not dear if you
believe that we are near the industry nadir. If things do get worse then the
strategic possibilities of the Qataris 26% stake become more pertinent. (Neil Cumming,
6th May 2015)
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. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk Twitter: @DividendPower
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