US Edition J Sainsbury
297.6p -2.7
Questor says BUY
Questor has had the stated view for some time that Tesco was the preferred supermarket play because of its global footprint. However, Sainsbury's shares are now looking very interesting on valuation grounds.
Sainsbury shares are about £1 lower than their highs earlier this year. These falls now mean the group has become a dividend play, with a prospective yield of 5.2pc in the current year rising to 5.6pc. Questor regards the dividend as safe.
In the 28 weeks to October 1, revenues rose 7.6pc to £12.8bn including VAT and fuel. When VAT and fuel are stripped out, sales on a like-for-like basis rose 1.9pc.
Pre-tax profits fell to £395m from £466m, but on an "underlying" basis were up 6.6pc to £354m. This was ahead of a consensus view of £350m.
Most of the difference between the statutory pre-tax profit figure and the "underlying" profits number is down to property. Last year, disposal of properties in the first half of the year generated a profit of £106m, compared with £36m this time. Also, revaluation of investment property resulted in a gain of just £3m this year, compared with £20m last year. The supermarket's property is now worth £10.9bn.
The interim dividend was raised by 4.7pc to 4.5p. It will be paid on January 6 and the shares trade without this payment from November 16. This is in line with company policy to make the interim payment 30pc of last year's full-year payout.
Of course, the economic backdrop is difficult and there are challenges facing the group – as there are for peers.
The group is looking to increase its floor space to boost earnings. It can do this by expanding existing stores and by buying new plots. Increasing space at existing stores is an ongoing programme and any sales growth by this route will appear in like-for-like sales. This is interesting because of the 1.9pc increase in like-for-like sales, 1.1 percentage point of this came from the store extension programme.
The question of new stores is interesting, too. The UK market is become relatively saturated, there is less opportunity for new openings.
However, the footprint of Sainsbury's stores across the UK when compared with rival Wm Morrison is interesting. Morrison is weighted to the north and Sainsbury to the south. It is easier (and cheaper) for expansion into the North than it is to try to build new stores in the south.
In the first half, 596,000 square feet of new space was added through store extensions and convenience store openings. For the full year, the group plans to add 1.4m square feet of floor space, with a further 1.25m square feet targeted for next year.
Tesco's recent price drop is also a challenge, as Sainsbury offers a price matching service. This means it is important to keep an eye on margins, but Sainsbury continues to perform well on the cost-cutting front.
The shares are trading on a March 2012 earnings multiple of 11.2, falling to 10.2, compared with Tesco on 11.4, falling to 10.1 and Morrison on 12.2, falling to 10.6.
The shares are a new buy based on valuation, its property backing and the fact Sainsbury has highest yield in the sector.