Profits are still growing, but the property portfolio is the key attraction.
Sainsbury (LSE: SBRY) is a supermarket on the move. CEO Justin King has successfully stemmed the decline that saw the nation's former number one grocer drop down to third position. He's done it through more efficient distribution, a sharper range of food and an expanding non-food offering, and an ambitious expansion of floor space through Sainsbury's Local stores as well as more traditional outlets.
Wednesday's half-yearly results show the momentum continues. Sainsbury has grown market share ahead of its rivals, thanks to that new space -- and in the past six months alone it added another 540,000 sq ft, as well as opening its first 100,000 sq ft store. Weekly transactions have risen by a cool million to smash through the 20 million mark.
On the face of it, this is reflected in strong figures, too. Total sales were up 7% to just under £12bn, and pre-tax profit rose 33% to £466m. Basic earnings per share soared 33% to 18.7p, and the interim dividend has been hiked 7.5%, to 4.3p.
Reading the labels
But while it's tempting to concentrate on fluffy stuff like Sainsbury's latest gongs ('Seafood Retailer of the Year', anyone?) and the 2,000 extra employees it added over the half, it's worth digging a little deeper into the numbers.
For instance, exclude fuel from the picture and sales growth in the half was a much lower 4.8%. More importantly, like-for-like sales growth was merely 2% -- well below Sainsbury's own target of 3-4%.
Sainsbury says this represents a "good performance in tough economic conditions" but given that its non-food sales grew three times the rate of grocery growth, I can't help concluding its rival Tesco (LSE: TSCO) -- which leads the way in non-food -- remains a better bet.
Online sales are up 25%, which might worry pricey-looking online specialist Ocado (LSE: OCDO), but Sainsbury doesn't reveal what those 120,000 weekly orders are worth in cash terms.
The operational advance in profits is far lower than the headline figure, too, with underlying pre-tax profits up 8.1%. That's still a very good performance, driven by efficiencies such as those self-scan checkouts springing up everywhere, but it's slightly less than analysts forecasted, which may be why the shares fell in early trading.
Invest in property
The difference in reported and underlying profits highlights the real attraction of these shares, and that's Sainsbury's commercial property portfolio. Profit on the sale of just a fraction of this property empire added £106 million to earnings for the half.
The upwards revaluation of Sainsbury's property portfolio continues, too, albeit at a much slower rate than earlier in the year -- and it's all being done without increasing debt.
In fact, I calculate that Sainsbury still only trades at roughly 1.3 times book value, which could make it an attractive target for the growing band of infrastructural funds scouring the globe -- not to mention the Qataris who are still the biggest shareholders, and who offered 600p per share for the company in late 2007.
Sainsbury's looks a much better business to own then it did three years ago, although arguably this is reflected in the P/E of almost 15, assuming full-year earnings of 25p. Its forecast dividend yield is 4%.
One for the shopping basket?
Valuation matters. I last held Sainsbury's shares back in May 2009, and wrote that while I liked the direction the company was going in, I felt the good news was in the share price. Since then Sainsbury's shares are ahead 8%, but Tesco has advanced 18% and the FTSE 100 is up 31%.
Sainsbury's still looks pricier than Tesco, which is on a P/E of 12.5, and Morrison (LSE: MRW), where the P/E is 12. And I can't help wondering how much more growth King can wring out of the operation now the easier stuff is done.
The bull case is that Sainsbury's is a low-geared business that will survive anything these uncertain economic times can throw at it, and it's pretty cheap given its property portfolio.
Widows and orphans can buy for the super-safe dividend, and perhaps enjoy a bonus should a predator come calling once more.
More from Owain Bennallack:
> Owain owns shares in Tesco.
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