Recovery continues apace at supermarket group Sainsbury and despite the disappointment of a failed takeover bid, the shares are well worth holding onto.
Recovery continues apace at supermarket group Sainsbury and despite the disappointment of a failed takeover bid, the shares are well worth holding onto.
Sainsbury reported a 28 per cent increase in underlying pre-tax profit to £488 million for the year to March 22, well in line with market expectations. Profit before tax edged up from £477 million to £479 million.
The really good news for shareholders is that the final dividend shoots up from 7.35p to 9p, taking the total up 23 per cent from 9.75p to 12p.
Total retail sales were up 5.8 per cent to £19.3 billion while like-for-like sales, excluding fuel, rose 3.9 per cent. With its Making Sainsbury Great Again initiative clearly working, the group has recorded 13 consecutive quarters of like-for-like growth. Sales, cost cutting and profit targets under this programme have all been exceeded.
Chief executive Justin King warns that consumer budgets are 'clearly under pressure' and he expects the market to remain 'intensely competitive'. However, he has achieved higher margins alongside rising sales and he points out that in harder times people eat at home more rather than spending money on visiting restaurants, which suits supermarkets fine.
Intriguingly, King reckons that quality food tends to be quite resilient in an economic downturn. Industry data suggests that Sainsbury's has in fact lost market share in recent months, with customers switching to cheaper supermarkets as one would expect. Perhaps that is why Sainsbury did not provide an update on current trading - it plans a statement covering the first-quarter of the new financial year on June 18.
Another point to ponder is that King puts food price inflation at Sainsbury at only about 2%, much lower than the 6.6% latest figure from the Office for National Statistics. There is a widespread though possibly incorrect view that the true figure is even higher.
Sainsbury announced plans to launch a non-food online business in the first half of the next financial year. The chain has dropped behind Tesco both in non-food and online sales so there is a bit of catching up to do.
About £15 million will be invested in the project in the current year and analysts are likely to trim their profit forecasts accordingly. Brokers are divided on prospects and on whether the recovery is more than priced into the shares, as they have been ever since King started to deliver.
Sainsbury shares slipped 14p to 376p in what seems to be an unduly pessimistic view of the results and outlook. They are now below the 400p level they had reached before the Qatar Investment Authority made a 600p a share indicative approach last year. Talks collapsed in November.
The Qataris still hold 25 per cent stake and are now free to make a fresh approach because six months has elapsed. The Sainsbury family holds 18 per cent. It seems unlikely that the QIA will come back with more given its unwillingness to do so last year, and the Sainsbury family can hardly accept less. It would therefore be unwise to count on a takeover bid at this stage, although it could happen.
However, Sainsbury shares have recovered some ground after collapsing to 320p in March this year and should resume their recent upward momentum. The forward P/E is not too demanding at about 16.5 times while the prospective yield is a respectable and solid 3.4%.
More: Sainsbury's Toasts The Difference
