33 Holborn, Chancery Lane, London, EC1N 2HT
Sainsbury is a household name and is by far the largest company that I have looked at so far. They have had a recent bad time of it so let’s see if this is a buying opportunity.
For those who don’t already know, Sainsbury is one of the “big 4” supermarkets in the country. They have a portfolio of nearly 1,000 stores comprised of both convenience stores and larger supermarkets. It is rather focussed on an ethical and healthy image and, like its peers, is branching into non food items. Indeed, Sainsbury is now the 7th largest clothing brand in the country.
They also have joint ventures in banking (with Lloyds TSB) and property (with British Land) and have a large property portfolio. They recently entered into a partnership with British Gas to supply energy.
Moving on to the income statement.
So, the total income for the year of £673M, up £160M from the year before seems like a very positive result. Revenue for the year is up more than a billion to be £21.1B. However, we can see that cost of sales also increased by close to a billion to leave gross profit up a respectable (but not a massive) £78M up.
Looking down these figures we see that £108M was made on the sale of property. This is a substantial amount more than in 2010 and adds a considerable gloss to these figures. What Sainsbury is doing is a sale and leaseback on stores that they do not plan to expand or develop. Although this is releasing money, it does seem a little short sighted to me. We see the figures further improved by a lack of pension charges but we also see that borrowing costs are up to £136M, which is not peanuts.
One other item of considerable interest is the reduction in profits from their joint ventures. These are profits from Sainsbury bank, the energy company and the property company and they have more than halved in the past year. Finally we see the total income further flattered by a heavy swing in acturial gains on the pension scheme.
So, although the headline figures are up on last year I am a little cautious. The increases in operating profits are completely wiped out by the decrease in profits of joint ventures and if we take out the property sales, and increases in the values of various items I make the overall profit down by £155M. This is a very rough calculation but the point is that these results are not quite as good as they first appear.
EPS and P/E Ratio
Something linked with the income statement and the performance of the company is the Earnings Per Share (EPS). This can be a good way of comparing performance on a like for like basis, taking into account acquisitions etc . Related to this is the P/E Ratio. This is calculated by dividing the share value by the EPS, thereby giving an indication of how much the market is willing to pay for the earnings. Apparently a value of 15-20 is about average, and one lower than this can indicate that a stock is undervalued or that the market does not expect future earnings to improve. The figures for Sainsbury are below:
| EPS |
2011 |
2010 |
| PROFIT AFTER TAX |
640,000,000 |
585,000,000 |
| NUMBER OF SHARES |
1,921,000,000 |
1,872,600,000 |
| EPS |
33.3 |
31.2 |
| UNDERLYING EPS |
26.1 |
23.6 |
| SP |
352.9 |
333.1 |
| P/E |
10.6 |
10.7 |
| UNDERLYING P/E |
13.5 |
14.1 |
Taking today’s share price, the P/E is a tiny 8.7 but various analysts expect the EPS next year to be about 27.1, leaving the forward P/E at 10.6 which, although rather low is exactly the same as the historical value in 2011 and seems fair.
Now to look at the Balance Sheet:
Net Assets overall are up £458M to £5.4B, with net tangibles up a similar amount. Within this we see a vast increase of the value of property & buildings, with a similarly large increase in the value of equipment and fittings. Presumably this is related to the opening of new stores during the year. We also see an increase of goods available for resale (inventories), which also ties in with the increase in stores opened. With regards to the current assets, we see increases across the board for receivables (£18M is receivable from the NHS and large amounts from credit card companies and external suppliers), while cash is reduced by £336M to be £501M.
Looking at liabilities, we see a fairly large increase in trade and other payables, suggesting a ramp up of operations offset somewhat by a more favourable pension deficit. We see that long term borrowings are fairly constant at an eye watering £2.3B. The provisions are made for onerous leases, group restructuring and long service awards.
On to cash flow:
Operating cash flow can be seen to be £102M above that of last year, but the headline figure shows a rather disappointing outflow of cash for the year of £334M. Looking into it a bit further, we see that more cash has been tied up in inventories and receivables. This is due to higher levels of non food stock to support sales growth and an increase in the level of goods in transit, driven by an increase in direct sourcing operations. We can also see that higher interest figures and higher taxes (due to the higher paper profit) have affected cash flow. There was also slightly more cash spent on acquiring property, plant and equipment.
There was a one off increase in cash from the sale and leaseback of some stores, as mentioned previously, and some cash was saved by paying back less in bank loans. The figures for 2010 were somewhat inflated by £250M gained from share issues and £235M gained more borrowing which were not repeated to anywhere near the same level this year. Indeed it should be noted that if it were not for these exceptional inflows of cash, the cashflow for 2010 would be negative also.
So, I feel that the cash from operations is not enough to sustain the huge amount of capital expenditure in property, plant and equipment (over £1B for the record) so unless Sainsbury can increase income, either the rate of investment needs to reduce or something else, like the (relatively) modest dividend payment could be under threat.
I will now have a quick look at the shareholder make up.
Largest Shareholders
Qatar Holdings 26%
Lord Sainsbury 5%
Judith Portrait 4.1%
Legal & General 4%
So, the standout figure here is the fact that Qatar Holdings, the investment arm for the Qatar Government. They are buying up assets in Europe, originally to diversify from Qatar’s reliance on Oil and Gas. They also own investments in VW and have recently bought Harrods and Paris St. Germain. Lord Sainsbury is the grandson of the founder, and in total the Sainsbury family still owns a large chunk of the group. Indeed Judith Portrait is a solicitor for the Sainsbury family and these shares are also owned by then by proxy. Legal & General are household names in the investment world.
There have been constant rumours that Qatar holdings wish to up their stake and become more involved in Sainsbury’s, or even stage a takeover but these rumours never come to anything and I suspect they are attracted by the prestige of the brand and the large property portfolio and intend to keep it as an investment.
Overall then, we see that Revenue is up to £21.1B, most of this is due to new openings, but not all of it. Online and non food is growing at a much quicker pace than food, but I’m not sure this is sustainable. Profit is up to £640M but when the £108M from the sale and leaseback of property is taken into consideration, the profit levels are lower than in 2010. Net Assets are very healthy, with more increases in the value of property but the negative cash flow is a bit of a worry. Share issues and new debt have masked the negative cash flow in 2010 and the current cash from operations is not enough to sustain both the dividend, and more importantly the massive £1.1B spend on tangible assets.
The UK supermarket arena is very competitive, but also rather profitable. Sainsbury does not have any stores outside of this country so they are very susceptible to consumer spending and confidence, which is clearly at a rather low ebb at the moment. In my mind, the have quite a good brand. It is not trying to race to be the biggest discounter like Tesco and Wallmart who are the largest two supermarkets in this country but they have a strong ethical trading brand. About a quarter of al fair trade sales in the UK are through Sainsburys and they were the first supermarket to make sure all their canned tuna was line caught, winning an award from Greenpeace in the process.
The group also has a very successful, quality own brand and sells more own brand products, proportionally than any other major UK supermarket. Indeed, Sainsbury has a rather enviable reputation for quality and ethics while not being as expensive as the more premium supermarkets such as Waitrose and M&S. They are focussing on expanding further into the convenience market, following in Tesco’s footsteps in this regard and like the other major supermarkets, are investing further into a non food offering. The expansion plans continue, with the board expecting to add 1.25M square feet of selling space per year.
Another thing that they are doing is to sell and lease back all supermarkets considered “fully developed”. Now, I understand the theory here that this money is better used further expanding the business but it is a trend that I don’t think I am fully comfortable with. One of Sainsbury’s greatest assets is its property portfolio and by selling the stores off they are eroding this somewhat. Also, I am not sure what is meant by “fully developed” and how this is measured. I would have thought it was conceivable in the future that Sainsbury may want to expand in different ways and by selling the stores off, this ability would be hampered somewhat.
Sainsbury’s seem to be very well hedged against changes in exchange rates, with a 20% change in the GBP to USD or EUR rate only affecting the balance sheet by £1-2M. The profits from the bank joint venture are up slightly to £11M and further increases are expected next year but net debt, by the end of next year is expected to be higher, at £2B
Overall then, profits are up but cash flow is negative. I understand that this is a very competitive area and Sainsbury is expanding aggressively but at some point, in order to make some cash without increasing borrowing (which, given the property assets, Sainsbury can easily do), the capital expenditure needs to be reigned in somewhat. Also, it is worth noting that the sale and leaseback programme gives the profit a bit of a gloss. The company is trading on a ridiculously cheap P/E of 8.7, but this is including profits from sales of property and the future expected P/E is 10.6, which is historically where Sainsbury usually trades. The dividend, if kept as is, is a healthy 5% and quite an attraction but I feel with the aggressive expansion and downturn in consumer confidence and the focus on just the UK economy, Sainsbury is probably more of a HOLD at the moment. I will look to perhaps add more if the share price drops more or there seems to be an upturn in cash flow or consumer confidence.
In June, Sainsbury released a trading statement saying that sales are up 7.3%, which was driven by new store openings, increases in convenience trade, online and non food. These are fairly pleasing figures.
In October, Sainsbury issued another trading statement where the story was much the same, sales were up 7.6% in Q2.