The market was evidently stirred (but not shaken, of course) by Sainsbury’s (SBRY) first half results, which arrested the slow but drifting decline in the share price. It demonstrated that the market has discounted much and that the share responds positively to good news. In the six months, Sainsbury’s did the unexpected thing of maintaining market share. Moreover, it has a number of non-food, organic growth nodules which seem to be contributing to future growth prospects. I stick to my judgement that these shares now look oversold on valuation metrics.
As a proponent of the idea of buying Sainsbury’s shares last month (because they were oversold at 253p and looked bombed out) it is good to see that it is not only the Empire that is striking back. Around at Sainsbury’s, the CEO is showing evidence of doing things to thwart the machinations of those intruders from outside the galaxy of British supermarket retailing.
First and foremost, in the first half of this year, Sainsbury’s has conceded no market share territory; its market share remains at 16.4%. That is first, a remarkable achievement and second, a vindication of the company’s efforts to do exactly that. There is clearly something in the company’s management of its affairs and the nature of its market offer that has achieved a relatively better result than Tesco and Morrisons. Perhaps, in part, something in its retail DNA inherited from its founding ideas when Sainsbury’s stores were decorated by specially made tiles picturing ceramic murals of country farming scenes; and men in white aprons used to cut your cheese bespoke, with large garrotting wires from large wheels of the stuff; and patted your bespoke butter portion into a shape with large, wooden, handheld butter patting paddles – made by craftsmen, no doubt – before depositing the individually modelled butter of your choice into a hand cut sheet of grease proof paper.
Perhaps that spirit of genteel artisan grocery and the spirit of the age of the Lords Sainsbury still permeate the company. I detect something of that when I shop there, just as I seem to find (or did find) something of Jack Cohen’s “pile it high and sell it cheap” ethos in Tesco, which has lost market share. Jack Cohen’s spirit of East End rough and tumble tended to manifest itself at Tesco just as the West End gentility of J. Sainsbury is still faintly manifest there. It comes as no surprise that J. Sainsbury reported that its staff (‘colleagues’ as the CEO refers to his workers) had been awarded the “Grocer Availability” Award for the third year running. I assume that means available staff to help.
In the half year, group sales were down 2% year on year but that reflected the fall in the oil price; when that is stripped out sales year on year fell by just 0.1%. However, like for like sales were down 1.6%. Underlying profits before payment of tax sank nearly 18% as did basic earnings per share. The return on capital employed was 9.1% in comparison with 11.1% for the same period in the previous year. The interim dividend payout was 4p, reported as an amount equivalent to 30% of last year’s annual dividend.
So the challenge is still there. Profits had to be sacrificed as £150 million was ‘invested’ in price reductions. Even then, food sales fell nearly 1% although the retailer’s own brand product sales rose 2% in volume. The brand was reported to be the best supermarket brand by Good Housekeeping. So the company clearly evidenced ‘own brand’ strength.
The growth nodules along the stem of the Sainsbury’s business include: stronger own brand sales; increasing strength in clothing sales (which increased 10% in the first half); growth in the operating profit from the Sainsbury’s Bank; the growth and increasing profit contribution of convenience stores, of which a further thirty seven were opened in the six months. Convenience stores saw sales growth of 11%. Since the number of new openings amounted to just over 5%, that alone did not account for sales growth. Moreover, the company reported online sales increasing by 7%. Finally, six supermarkets are being altered and adapted to accommodate perceived changes in shopping habits.
Glancing at the latest consensus market estimates, I see that the market does expect a reduction in Sainsbury’s sales revenue for this year, but only by 0.25% to an estimated £23.5 billion. But earnings per share are estimated to fall 16% this year to an estimated 22p, putting the shares on a forward estimated price to earnings ratio of 11.3 times. However, with an internal demand for cash, the estimated annual dividend payout for this year is forecast to come in at 10.74p or an estimated, forecast annual dividend yield 4.4%. That is an attractive yield.
So what else does an investor get for buying Sainsbury shares? First, a lot of sales revenue. On the basis of last year’s annual sales revenue at £23.5 billion on an equity capitalisation of £4.8 billion, the shares trade on a price to sales of just 0.2x. Put another way a share price of 253p buys historic sales revenue of an estimated 1,237p per share.
Second, there is a very low price to book valuation. In fact the share price last seen stands at an estimated 13% discount to balance sheet net assets in March. The market capitalisation of Sainsbury’s equity, currently standing value at £4.8 billion, commands an enterprise value which is three and a half times larger. In the balance sheet of 14th March last, total assets were stated as £16.5 billion. Also note that last year’s EBITD (basically profits before interest, taxation and depreciation are charged) amounted to £770 million, which puts Sainsbury’s shares on an EBITDA ratio of only 6.2 times on the basis of last year’s figures. Despite the gearing, interest e costs were reportedly covered 6.0 times on an annual basis and 7.4 times on an interim basis. The shares price also stands at only 3.7 times last year’s annual cash and near cash held on the balance sheet. Such valuations are strikingly low. I continue to see these shares as good value with an attractive forecast dividend yield.