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sainsbury
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Performance: During the five year including estimate 2012E finan-
cial data, Sainsburys have managed to keep producing increasing rev-
enues and comprehensive income expect in 2009 recording a negative
comprehensive income.
Expansion: Sainsburys borrowings have increased in order to fi-
nance their growing company by opening more outlet and also diver-
sification into financial services.
Corporate Responsibility: Customers and other stakeholders have
gained the trust of Sainsburys to act responsibly on their behalf.
Sainsbury's goal is to offer their customers great quality product at a
reasonable price, since the financial crisis customers are more consci-
entious of how they spend.
Like for like Sales: Sainsburys performance during this period has
been exceptional with their like-for-like sales for the year 2.3%. With
this growth it has enabled the company to maintain a good level of
shareholders return (Year 2011 - Annual Report).
FIVE YEAR SUMMARY 3.51p 19 March 2011
SUMMARY
Recommendation BUY
Target price () 5.32
Shares (millions) 1872
ROCE (E2009) 24.71%
Beta 0.62
P/E (E2011) 14.76
P/B (E2011) 1.83
Total sales growth 4.9%
ANALYST EQUITY REPORT
Volume 1, Issue 1
J SAINSBURYS PLC
We have suggested a BUY recommendation for Sainsburys
share at 5.32p. Based on the calculation it suggested that Sains-
burys share price has been UNDERVALUED and we recom-
mended a BUY due to the Sainsburys potential domestic growth
and expansions within Britain as well as showing encouraging
performance during the 2008-2009 economic crisis.
EQUITY REPORT RESEARCH EUROPE
STUDENT ID- 1035280, AFSA
16/01/2013
Sainsbury is the third largest British retailer in the UK (Telegraph, 2012). Sainsbury became popular by
offering quality dairy products at low prices (Datamonitor 360, 2012) with main strong competitors such
as ASDA, Tesco, Marks and Spencer group and Morrison's. Sainsbury also engages in financial service,
property investments, fuel as well as retailing such as food other household items. Sainsburys have prov-
en to be high successful within the UK with market share of 16.3% (Sainsbury, 2012).
Aim of Report
Company Overview
Page 2 J SAINSBURYS PLC ID: 1035280
The main focus of this report is to analyse and in-
terpret the financial statement of Sainsbury for a
four year period (2008-2011) and also forecast their
2012 statements based on analyst reports and as-
sumptions. This is broken down into different parts
for detail breakdown of analysis and interpretation;
The first section will analyse Sainsburys finan-
cial position while also looking at their credit
status which will be compared to Tesco plc and
industry average. This will be done with the use
of ROCE and credit status ratios.
The second section involves the use of common
size and trend analyses to forecast Sainsbury
2012 financial statement based on analyst reve-
nue projection report. I will utilise the CAGR
formula to estimate my own judgment of the
revenue figure while also comparing it with the
actual 2012 financial statement..
The final section calculates the companys fore-
casted value of equity per share at the end of the
2011 with the use of Residual Earnings Model.
Throughout the analysis report for the four years
timeline (2008-2011), Tesco Plc will be used as
Sainsbury comparative competitor. The calculated
ratios will be used as a comparison medium between
the two companies. In order to draw conclusions
based on their financial performance over the four
year period.
Share price movement between Sainsbury's (Blue
Line) and Tesco (Red Line) from 20082011
For an effective equity analysis, both Sainsburys and Tescos financial statements (i.e. Balance Sheet,
Cash flow Statement and Income Statement) are reformulated. Reformulation of financial statements re-
quires the separation of financing and operating items in the financial statement. This differs from tradi-
tional credit analysis which classifies them into current and long term (Penman, 2010). All in all, reformu-
lation provides the following benefits (Penman, 2011); reformulating also help in distinguish different
components of income such as core operating income from sales, other core operating income, and unusu-
al items, which facilitates forecasting.
Reformulation of Financial Statements
Profitability Analysis
Ratio analysis for Sainsbury's:
Ratios (Level 1&2) Abbreviations 2008 2009 2010 2011
Return on Common Equity (%) ROCE 13.58 -9.05 10.33 12.41
Return on Net Operating assets (%) RNOA 10.70 -4.44 7.51 9.51
Operating Profit Margin (%) PM 4.23 -1.54 2.72 3.44
Asset Turnover ATO 2.53 2.87 2.76 2.76
Financial Leverage (%) FLEV 42.88 50.46 45.51 40.84
Net Borrowing Cost (%) NBC 3.98 4.71 1.32 2.41
RNOA - NBC 6.71 -9.14 6.19 7.10
FLEV x (RNOA-NBC) 287.87 -461.33 281.85 289.77
Operating Leverage (%) OLLEV 41.89 49.54 47.27 45.88
Maclaney (2002), states that ratio helps to provide an overview of the business financial condition; it is the
first step of assessing Sainsburys and Tesco in terms of performance, liquidity and solvency. The calculat-
ed profit analysis ratios (ROCE break-down) will help us establish Sainsburys and Tesco historic perfor-
mance over the period (2008 - 2011) -including the economic downturn in 2007-2008.
Page 3 J SAINSBURYS PLC ID: 1035280
Ratio analysis for TESCO PLC:
Ratios (Level 1 & 2) Abbreviations 2008 2009 2010 2011
Return on Common Equity (%) ROCE 21.10 14.40 15.32 16.59
Return on Net Operating assets (%) RNOA 13.00 7.67 10.58 11.62
Operating Profit Margin (%) PM 5.33 3.60 4.63 4.94
Asset Turnover ATO 2.44 2.13 2.28 2.35
Financial Leverage (%) FLEV 63.00 96.42 69.82 55.71
Net Borrowing Cost (%) NBC 0.15 0.69 3.79 2.72
RNOA - NBC 12.85 6.98 6.79 8.91
FLEV x (RNOA-NBC) 809.68 673.12 474.16 496.14
Operating Leverage (%) OLLEV 50.86 63.59 71.05 73.72
Profitability Analysis (Continued)
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
2008 2009 2010 2011
%
Years
ROCE (2008-2011)
Sainsbury's
Tesco
Looking at the graph above, it shows that Sainsburys ROCE dipped very low in 2009 compared to Tesco.
This could be due to credit crunch crises which affected the whole economy especially consumer spend-
ing's. There are several value drivers ratios that could explain why Sainsburys ROCE fell lower than
Tesco. However, during the recession Sainsbury till managed to hold 16.1% market share compared to the
previous year of 15.8% (Farnham , 2009). Although, Sainsburys generated a negative operating profit of
(292.07) during this period.
Sainsbury ROCE recovered and rose to 12.41% in 2011, which was gradually increased from a negative (-
9.05%) in 2009.
RNOA ratio for Sainsburys showed a negative -4.44% in 2009. This could be due to having a negative
operating profit because of the economic crises in 2009 which had an adverse effect on the pension
scheme. It resulted in reductions in net operating assets in that year. However, Tescos RNOA ratio has
been more stable over the four year period compared to Sainsburys. In the aftermath of the economic cri-
sis, this made little impact on Tescos financial position due to its highly diversified business. Although,
Tesco suffered losses on their dirty surplus items such as pension scheme and foreign currency translation,
overall it led to a decrease in NOA which relatively led to a low RNOA in 2009. Furthermore, after 2009
both retailers saw growth due to improvements in the economy and thus an increase in consumer confi-
dence.
Page 4 J SAINSBURYS PLC ID: 1035280
Profitability Analysis (Continued)
Net Borrowing Cost (NBC) - on average both Sainsburys and Tesco have 3.11% and 1.83% NBC ratio
respectively. Sainsburys had the highest NBC between 2008-2009, which worsen in 2010 and gradually
improved by 2011. While, Tescos NBC was at its lowest in 2008, which gradually improved by 2010. This
meant that Tesco cost of borrowings dropped, when interest rate decreased to 2.0% in 2008 (HouseWeb,
2012). This suggested that on average Tesco were better strategically by taking advantage of the fall in in-
terest rate by borrowing more compared to Sainsburys who did not make use of the fall in interest rate.
The graph below shows the difference in both companies total borrowing (short term and long term) during
the four year period.
Operating Profit Margin (PM)- in 2008, 2010 and 2011 both companies had a stable and positive PM.
But in 2009, Sainsburys had a negative PM which was down to the effect of the economic crisis, this grad-
ually improved by 2010. Regardless of the economic crises both companies still managed to generate in-
creased sales revenue throughout the four year timeline which did not have a major influence on a dramatic
increase in cost of sales.
Several articles revealed that both retailers implemented price war strategic plans between other competing
market share retailers in order to attain a favourable profit margin.
Asset Turnover (ATO) Over the four year period,
ATO for both firms has been fairly constant consid-
ering consumer attitudes towards spending in reces-
sion. Although in 2009 when the economy per-
formed poorly, it had a positive effect on Sains-
burys ATO. Compared to Sainsburys in this year,
Tesco generated a lot more sales revenue than Sains-
burys during this period. However, Tesco was less
efficient in using its assets to generate revenue in this year in comparison to Sainsburys and other years.
Sainsburys cash flow statement (Cash Investment (I)) shows that the firm invested in joint venture and
associates - IT services firm (Taylor, 2012) in order to be provide better online services. However, compare
to Tesco who invested heavily on PPE which can be concluded to be their highest investment throughout
the four years. In order to improve efficiency and ATO overall, Tesco should be cautious in what it invests
in during uncertain economic periods. For example, Sainsburys did not invest heavily on operating assets
but rather utilised existing assets. ATO can also be broken down into different levels such as Inventory and
PPE turnover. For the breakdown calculation ATO refer to Appendix 4.1a. On average both Sainsburys
and Tesco have 2.73 and 2.30 ATO respectively.
0.00
1.00
2.00
3.00
4.00
2008 2009 2010 2011
%
ATO (2008-2011)
Sainsbury's
Tesco
Page 5 J SAINSBURYS PLC ID: 1035280
Profitability Analysis (Continued)
Operating Spread (SPREAD) (RNOA>NBC) - Both Sainsburys and Tesco had a desirable Operating
Spread over the four year on average (except year 2009), especially in 2011 for Sainsburys and 2008 for
Tesco. In situations when a positive spread is achieved it means the chances of shareholders receiving
greater return are high. This suggests that Tesco and Sainsburys have earned more returns on their Net Op-
erating assets to be able to cover the borrowing costs. Sainsburys obtained a negative NBC in 2009 as
RNOA was less than NBC. Year 2009 was a generally poor economy for both retailers and the general
public, it affected Sainsburys in which a negative Spread of -9.14% was attained. The manager at Sains-
bury did not do a good job i.e. a higher costs of borrowing was incurred due to poor decision making dur-
ing the financial crises in 2009. The managers went over optimum borrowing levels, which meant that all
financial liabilities could not be covered by operating income and also it led to attaining a high gearing ra-
tio (FLEV). This could have been avoided if careful attention was paid to financial liabilities and the bor-
rowings of finance was wrongly timed.
Operating Liability Leverage - Sainsburys have managed to maintain their ratio below 50% while
Tescos ratio shows continuous increase throughout the four year period. Tescos continuous increase
could be due to generated higher operating liabilities and revenues mainly because they have many outlets
compared to Sainsburys. Sainsburys ratio was at its maximum in 2009 and after that it declined.
Page 6 J SAINSBURYS PLC ID: 1035280
0
5000
10000
15000
20000
2008 2009 2010 2011
Axis
Title
Years
Total Borrowings (2008-2011)
Sainsbury's
Tesco
Profitability Analysis (Continued)
Financial Leverage (FLEV) - Sainsburys is not as geared as Tescos which ratio stood at 96.4% in
2009, while Sainsburys was at 50% for the same year. Tescos high gearing ratio was because of the in-
crease in lending in the wake of low interest rate. Overall, it can be said that Sainsburys were less risky in
comparison to Tesco. One of the main reasons why Tesco was highly geared in 2009 could be due to the
fall in interest rate in the UK. Unfortunately, Sainsburys did not take advance of the fallen interest rate but
rather they played safe in order to avoid huge finance cost due to the uneven market. After 2009, borrowing
for both retailers gradually decrease by a low percentage and this was expected to reduced FLEV - this was
reflected in years 2010 & 2011.
Analysis of Credit Status and other performance ratios
For most creditors, they are concerned about a firms ability to meet its short-term and long-term obliga-
tions through analysing their liquidity, solvency and operating ratios based on the reformulated financial
statements i.e. income statement. The commonly recognised ratios will be used to analyse the credit and
liquidity status of Sainsburys and its competitor Tescos.
Stock turnover days for both Sainsbury and Tesco have averaged 17 days. Both Sainsburys and Tesco
have managed to maintain a 14days and 20days stock turnover days respectively which are slightly high
but as long as the perishable goods are often rotated. However, both companies also stock domestic items
which are less likely to be influenced by technological changes within their holding period. Overall, both
retailers have managed to keep an eye on the amount of stock by knowing their Economic Order Quantity
(EOQ) which reflected on their steady stock turnover ratios over the four years. Sainsburys better perfor-
mance on this ratio than its competitor is because they hold less stock than Tesco, which means Tesco
takes longer to replenish its stocks
Debtors Days - Sainsburys have a relatively average of four debtor days for the first three years, which
gradually increased to 5days after the financial crises. Due to Sainsburys policy, majority of their custom-
er transactions are done on a cash basis which means less credit sales are offered to customers. Compared
to Tesco which has increasing debtors days, this could signify that credit sales are offered to customers in
order to generate more revenue. Due to high diversification by Tesco in the market, there is incentive to
increase their debtors to increase customers.
Page 7 J SAINSBURYS PLC ID: 1035280
Analysis of Credit Status/ other performance ratios (Continued)
Other Performance Ratios 2008 2009 2010 2011
Debtors Days 4.22 3.76 3.93 5.93
Creditors Days 49.43 50.80 47.67 47.53
Current Ratio(:1) 0.66 0.55 0.66 0.58
Quick Ratio(:1) 0.40 0.31 0.41 0.31
Stock Turnover Days 14.76 14.07 13.57 14.86
Interest Cover (times) 4.02 4.55 4.80 7.34
Gross Profit Margin(%) 5.62 5.48 5.42 5.50
Cash Flow to Sales(%) 5.08 5.38 5.47 4.51
Cash Flow to Assets(%) 8.96 10.13 10.07 8.35
Other Performance Ratios 2008 2009 2010 2011
Debtors Days 10.12 12.08 12.11 13.86
Creditors Days 60.82 62.08 65.89 68.49
Current Ratio(: 1) 0.61 0.78 0.73 0.67
Quick Ratio(t:1) 0.38 0.63 0.56 0.49
Stock Turnover Days 20.31 19.44 19.04 20.66
Interest Cover (times) 11.46 6.94 6.03 8.01
Gross Profit Margin(%) 7.67 7.76 8.10 8.30
Cash Flow to Sales(%) 7.83 8.43 9.40 7.36
Cash Flow to Assets(%) 12.27 9.94 11.62 9.50
Creditors Days - Creditors days for Sainsburys and Tesco reveals that they both obtain payments from
their debtors first before paying their creditors. This should reflect a better working capital for both retail-
ers. In 2009, it took Sainsburys few days longer than average to pay their creditors due to the economic
situation. However, Tescos creditors days continued to rise which meant they took longer to pay their
creditors than Sainsburys after 2009. This could have been the result of a stronger relationship between
Tesco and its suppliers resulting in stronger cash flow statement. Sainsburys suppliers on the other hand,
seems to requests their payment earlier after 2009 - which is reflected on their ratio i.e. decreasing (2009-
2011).
Sainsburys other ratios
Tescos other ratios
Current Ratio - The higher the current ratio, the more capable the company is of paying its obligations
(Investopedia 2012). Sainsburys and Tesco were able to cover their short-term financial obligations but
the ratio was not strong enough. On average, Sainsburys has (0.61:1) while Tesco had (0.70:1). However,
in 2011 Sainsburys ratio dropped slightly which was below the industry average when industry average
was at 0.60:1(Thomson One Banker, 2013).
Over the four year period, Sainsburys current ratio seems rather unpredictable, while Tescos current ratio
increased from 2008-2010 and later decreased slightly by 2011. The fall in interest rate cause Tescos in-
creased current ratio which led to Tesco borrowing more and having more cash in hand in order to survive
during the financial crises. While Sainsburys utilised their liquidity assets for promotion and marketing
which seemed profitable and generated increased sales revenue, but worsened current ratios.
Page 8 J SAINSBURYS PLC ID: 1035280
Analysis of Credit Status/ other performance ratios (Continued)
Quick Ratio- is an indicator of short term liquidity and also the ability for the companies to meet its short
term obligation without the use of its liquid assets. The ratio calculated for Sainsburys and Tesco show
the ability to both of them surviving without relying on stock (inventory). Sainsburys ratio is rather unsta-
ble and unpredictable either it will increase or decrease. Unlike Tesco, thia ratio increased from 2008-2010
and later decreased in 2011. The calculated ratio signifies that on average Tesco relies more on their stock
compared to Sainsburys.
The decline in Sainsburys quick ratio may have resulted from Sainsburys missed opportunities to borrow
funds when interest rates were low, as cash held declined slowly over the four year periods. Moreover in
2011, Sainsburys held the least cash in comparison to other years and also industry average ratio is the ra-
tio the same as Sainsburys ration 0.31:1 (Thomson One Banker, 2013)
0.00
0.50
1.00
2008 2009 2010 2011
Ra
tio
(:1
)
Years
Sainsbury's Quick & Current Ratio
Quick Ratio
Current Ratio0.00
0.50
1.00
2008 2009 2010 2011
Ra
tio
(:1
)
Years
Tesco's Quick & Current Ratio
Quick Ratio
Current Ratio
Gross Profit - Sainsburys gross profit ratio
appears to be decreasing from 2008-2010.
But regardless of the decrease in the ratio,
Sainsburys still managed to maintain in-
creasing healthy revenue each year. However,
cost of sales also increased which contributed
to the slight decrease in the ratio. On the oth-
er hand however, Tescos ratio showed a con-
tinuous increase in its gross profit ratio which
was mainly due to the increase in sales turnover. The fall in Sainsburys ratio could be due to lack of bar-
gaining power in terms of negotiations with their creditors in order to receive better discounts for goods.
Sainsburys ratio in 2011 seems to be above the industry average which was at 6.85. This means on aver-
age they are performing okay.
0.00
5.00
10.00
2008 2009 2010 2011
%
Years
Gross Profit Margin
Sainsbury's
Tesco
Page 9 J SAINSBURYS PLC ID: 1035280
Analysis of Credit Status/ other performance ratios (Continued)
Cash flow to Assets this ratio helps to measures how well a company is able to generate operating cash
from its current operating activities. Both Tescos and Sainsburys ratios has been unstable over the time-
line. The ratio is affected when either of the retailers invests or sells fixed assets or an increase/decrease in
cash from operations. Sainsburys was very efficient in 2009 as Tesco was also in 2008. Nevertheless, in
2011 both retailers total assets were at the highest which made the ratio to fall to its lowest. As a result,
both retailers were not efficient in maximising the full capacity of their assets as less cash was generated
from operations.
Cash flow to Sales the higher the ratio the better, because it indicates the level the companys financial
strength. The ratio also indicates the ability for both Sainsburys and Tesco to translate their sales into cash
(proportion of cash from operations in overall sales).
Both companies experienced an improvement in the ratio up until 2010. The decrease in 2011 was due to
both companies experiencing a decrease in cash from operations as sales continued to rise. I personally
think that the increased rate at which Tesco offered credit sales to their customers might have had an ad-
verse impact on the ratio.
Interest Cover - A high interest cover ratio means that a business can easily meet its interest obligations
from profits (Bized, 2012). The ratio tells how easily Sainsburys and Tescos can pay interest on their
outstanding debts. Sainsburys had much lower interest cover in comparison to Tescos over the four year
timeline. Which means Tesco can cover their interest debt many times than Sainsburys. For example,
Tesco were able to cover their interest twelve times in 2008 while Sainsbury could only cover theirs four
times. Again, based on the financial crisis in 2009 Tescos ratio decreased, this could also be due to in-
crease in borrowings while Sainsburys ratio still gradually increased from 2008 - 2011. A lower interest
cover could mean danger to a business, but luckily
Sainsbury ratio peaked in 2011 mainly because Sains-
burys finance cost was at its lowest during this period.
Overall, Sainsburys ratio was much lower than
Tescos, this could be due to Sainsburys have a lower
total borrowings (short and long term borrowings) in
comparison to Tescos . It is still uncertain why Sains-
burys borrowed lesser amount when they could have
taken the advantage of a reduce interest rate at 0.5%.
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
2008 2009 2010 2011
Tim
es
Interest Cover
Sainsbury
Tesco
Page 10 J SAINSBURYS PLC ID: 1035280
This part aims to explain how Sainsburys forecasted equity share price was arrived at the end of the fourth
year (2011). Based on my evaluation, the calculated value of Sainsburys share might help investors into
making the right decision on either to buy, sell or hold Sainsburys shares.
By using Residual Earnings Model which is the most commonly used model by analyst (Investopedia,
2012) , the share price calculated by using this model will be compared to the actual share price of Sains-
burys as at 19th March 2011.
In order to calculate my own estimation of 2012s revenue, I made use of the Compound Annual Growth
Rate (CAGR) - RBS (analysts) use the same method for forecasting (Scarborough, 2012).
I chose to use this model for forecasting 2012 revenue and used the common size and trend analysis to
forecast the rest of the income statement.
The formula accounts for growth rate changes from year to year (4.29%) which was later multiplied with
2011 revenue in order to arrive at my own predictions of 2012 revenue figure - which was close to the ac-
tual and other analyst revenue figures. The analyst revenue figures includes macro-economic factors such
as cost of inflation, but these predictions varies from analyst to analyst so it can tend to be subjective.
CAGR Model Rate 4.29%
Year 2011 Revenue 21102
CAGR Model Revenue 22007
Analyst Revenues
RBS 22540
Evolution Securities Plc 22085
Santander 22325.6
My predicted Revenue was quite close to the actual 2012 Revenue (22,294 m). The next stage was to
gather twenty four years worth of Sainsburys share prices and FTSE ALL SHARE price index
(Appendix 1.3a). I was able to calculate the return index for both Sainsburys and FTSE ALL SHARE.
This enabled to arrive at a beta by using the regression analysis tool.
Page 11 J SAINSBURYS PLC ID: 1035280
Forecasting and Share Price Valuation
ANOVA
df SS MS F Signifi-cance F
Regression 1 0.260358339 0.260358 52.47244 4.03E-12
Residual 287 1.424039673 0.004962
Total 288 1.684398012
Coeffi-cients
Standard Er-ror t Stat P-value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.001231 0.004166711 0.295457 0.767858 -0.00697 0.009432 -0.00697 0.009432
X Variable 1 0.618599 0.085397227 7.243787 4.03E-12 0.450515 0.786684 0.450515 0.786684
CAPM can be described as a model that describes the relationship between risk and expected re-turn and that is used in pricing risky securities (Investopedia, 2013)
(Investopedia, 2013)
Through this method (CAPM) I was able to arrive at Sainsburys cost of equity at 7.58%. The true worth
of a companys share price is very important to shareholder and other stakeholders (such as investors) in
order to aid them in buying or selling shares.
The calculated forecasted value of equity per share was estimated based on Evolution Security Plc (analyst)
forecasted revenue estimate and the actual 2011 data. The Residual Earning Model has been used to val-
ue Sainsburys share price as at the end of March 2011. Three different assumptions have been put into per-
spective when using this formula to calculate the earnings per share. While calculating the third case per-
spective (Case 3), 0.7% economic GDP was used since retailer industry has been growing in line with the
economy which was at 0.7% in 2011 (BBC, 2012).
By using a regression analysis tool I was able to arrive at Sains-
burys Beta which was later used in conjunction with CAPM to
calculate Sainsburys Cost of Equity.
Page 12 J SAINSBURYS PLC ID: 1035280
Forecasting and Share Price Valuation Continuation
Forecasting and Share Price Valuation Continuation
Valuation : Residual Earnings (RE) Model
2011 (m) E2012 (m)
Reformulated Income statement
Operating income 726.48 773.11
Net financial expenses
-53.48 -51.87
Comprehensive income (included the amount for MI)
673.00 721.24
Reform. Balance Sheet
Net operating assets 7639.00
Net financial obligations 2215
Ordinary shareholders' equity (included MI) 5424.00
Residual Earnings 310.1
Case 1: Assume that RE after 2012 would be zero because of strong competition in the in-
dustry.
Intrinsic value of BT's equity in 2011 5712.25
Intrinsic per share value (s) 3.05
Intrinsic P/B 1.05
Intrinsic P/E 8.49
Case 2: if it assumes that REs after 2012 will remain as 310.1 forever.
Intrinsic value of BT's equity in 2011 9515.04
Intrinsic per share value (s) 5.08
Intrinsic P/B 1.75
Intrinsic P/E 14.14
Case 3:Assuming the growth rate is 0.7% based on the economy GDP
Intrinsic value of BT's equity in 2011 9931.28 9931.28
Intrinsic per share value (s) 5.31
Intrinsic P/B 1.83
Intrinsic P/E 14.76
Additional information:
Share price of Sainsbury on 19 March 2011 is 3.51, source: Sainsbury's Annual Report
Therefore, the market over values Sainsbury's share
From my calculation Cost of Equity is 7.58%
No. of shares outstanding is 1872 million, from Sainsbury 2010/2011 annual report.
Page 13 J SAINSBURYS PLC ID: 1035280
SUMMARY
Analyst Share Price Assumption
Evolution Securities this analyst initiated a Reduce because Sainsburys did not deliver the total sales
growth target of 8% but rather they achieved 7.5%. And also the analyst believe that with Sainsburys un-
derling growth which were currently unimpressive, in addition with market deterioration and growth rate
getting weaker due to inflation. Evolution urges investors to sell Sainsburys shares at a target price of
350p.
Santander However, this analyst suggested a Hold of Sainsburys share at target price of 400p due to
Sainsburys attaining three times growth on non-food items which driven by Sainsburys opening new out-
lets in order to boost sales. This means that management strategies have proven to be successful and can be
seen in the foreseeable future.
RBS finally, RBS suggested a Hold at the target price of 370p. This is due to Sainsburys performing very
well in the third quarter or 2011. Although sales growth target are not been achieve, RBS are positive
Sainsburys can have continuous development in their business model.
Page 14 J SAINSBURYS PLC ID: 1035280
The Residual Earnings Model suggests that Sainsburys share price should be currently at a value of 5.31.
In comparison to the actual share price of 3.51 as at 19th March 2011. The estimated share price is dif-
ferent from the actual which means that the market has undervalued Sainsburys shares. Residual earnings
model assumes three different cases in calculating the share price of Sainsburys.
RBS suggested that investors should Hold on the bases that the share price is likely to increase between the
financial year of 2010-2013 and with EPS CAGR of 10%.
In conclusion, the market has undervalued Sainsburys share and I believe that it has the potential to rise
to the target price of 5.31. I would advice investors to buy and hold.
APPENDICES 1.1 SWOT ANALYIS OF J SAINSBURYS
Strengths Weaknesses
Significant market presence in the UK
Robust portfolio of own-labelled products
Strong results in tough economic and macro envi-ronment
Concentration of operations in the UK could affect the performance in case of any unfavourable eco-nomic scenario
High debt burden
Opportunities Threats
Growth opportunities in the Chinese and Indian economies
Growth potential in the online distribution channel
Rise in demand for organic foods
Rising labour cost in the UK
Weak consumer spending in the UK
Intense competition
Page 15 J SAINSBURYS PLC ID: 1035280
Datamonitor 360 (2012)
APPENDICES 1.2 INDUSTRY AVERAGE AS AT 19TH MARCH 2011
Industry Benchmark Ratio analysis :
Credit Status Ratios 2011
Stock Turnover Days 23.00
Current Ratio (to 1) 0.60
Quick Ratio (to 1) 0.31
Debtors Days 11.48
Gross Profit Margin(%) 6.85
Cash Flow to Sales(%) 5.66
Thomson One Banker, (2013)
file:///C:/Users/Tosin/Downloads/J%20Sainsbury%20plc.doc#strengths#strengthsfile:///C:/Users/Tosin/Downloads/J%20Sainsbury%20plc.doc#weaknesses#weaknessesAPPENDIX 1.3a
DATASTREAM DATA OF SAINSBURY AND FTSE ALL SHARE RETURNS
Start 19/02/1987 End 19/03/2011 Frequency M
Name SAINSBURY (J) - PRICE - LNGBP
FTSE ALL SHARE - PRICE INDEX
Code 926002(P.LNGBP) FTALLSH
Return
Return (FTALLSH)
CURRENCY
19/02/1987 235.31 960.83 19/03/1987 244.14 994.65
0.037525 0.035198734
19/04/1987 234.33 979.12
-0.04018 -0.015613532
19/05/1987 260.81 1103.1
0.113003 0.126623907
19/06/1987 284.34 1137.25
0.090219 0.030958209
19/07/1987 279.43 1234.49
-0.01727 0.085504506
19/08/1987 257.86 1120.81
-0.07719 -0.092086611
19/09/1987 274.26 1188.42
0.0636 0.060322445
19/10/1987 232.37 1074.58
-0.15274 -0.09579105
19/11/1987 224.53 824.11
-0.03374 -0.233086415
19/12/1987 218.65 867.07
-0.02619 0.052128963
19/01/1988 223.55 902.5
0.02241 0.040861753
19/02/1988 212.76 889.24
-0.04827 -0.014692521
19/03/1988 232.37 951.46
0.09217 0.069969862
19/04/1988 241.2 925.79
0.038 -0.026979589
19/05/1988 218.65 909.69
-0.09349 -0.017390553
19/06/1988 220.61 956.27
0.008964 0.051204256
19/07/1988 218.65 961.03
-0.00888 0.004977674
19/08/1988 213.74 961.62
-0.02246 0.000613925
19/09/1988 197.57 912.59
-0.07565 -0.050986876
19/10/1988 202.96 968.26
0.027281 0.061002203
19/11/1988 199.04 951.59
-0.01931 -0.01721645
19/12/1988 189.23 913.05
-0.04929 -0.040500636
19/01/1989 207.86 985.45
0.098452 0.079294672
19/02/1989 228.94 1058.89
0.101414 0.074524329
19/03/1989 217.66 1076.71
-0.04927 0.016828944
19/04/1989 225.51 1076.35
0.036065 -0.000334352
19/05/1989 237.27 1131.41
0.052148 0.051154364
19/06/1989 260.81 1103.16
0.099212 -0.024968844
19/07/1989 259.82 1170.28
-0.0038 0.060843395
19/08/1989 281.4 1204.75
0.083058 0.02945449
19/09/1989 279.43 1198.2
-0.007 -0.005436813
19/10/1989 247.08 1100.15
-0.11577 -0.08183108
19/11/1989 250.02 1115.15
0.011899 0.013634504
19/12/1989 253.94 1168.64
0.015679 0.047966641
19/01/1990 256.88 1169.46
0.011578 0.00070167
19/02/1990 257.86 1147.05
0.003815 -0.01916269
19/03/1990 256.88 1111.57
-0.0038 -0.03093152
19/04/1990 247.08 1085.2
-0.03815 -0.023723202
19/05/1990 266.69 1117.16
0.079367 0.029450792
19/06/1990 273.55 1168.35
0.025723 0.045821547
19/07/1990 296.1 1171.71
0.082435 0.002875851
19/08/1990 285.32 1065.7
-0.03641 -0.090474605
19/09/1990 298.06 1000.73
0.044652 -0.060964624
19/10/1990 301.99 1010.12
0.013185 0.00938315
19/11/1990 290.22 1009.06
-0.03897 -0.00104938
19/12/1990 302.97 1046.13
0.043932 0.036737161
19/01/1991 307.87 1006.8
0.016173 -0.03759571
19/02/1991 322.58 1115.14
0.04778 0.107608264
19/03/1991 340.22 1197.98
0.054684 0.074286637
19/04/1991 362.77 1220.16
0.066281 0.018514499
19/05/1991 370.62 1188.02
0.021639 -0.026340808
19/06/1991 339.24 1194.88
-0.08467 0.005774314
19/07/1991 368.88 1213.66
0.087372 0.015717059
19/08/1991 349.05 1216.23
-0.05376 0.002117562
19/09/1991 351.03 1253.48
0.005673 0.030627431
19/10/1991 354.01 1252.83
0.008489 -0.000518556
19/11/1991 327.23 1190.42
-0.07565 -0.049815218
19/12/1991 346.07 1146.78
0.057574 -0.03665933
19/01/1992 362.93 1213.08
0.048718 0.057814053
19/02/1992 365.91 1216.45
0.008211 0.002778053
19/03/1992 375.82 1186.78
0.027083 -0.024390645
19/04/1992 420.44 1268.47
0.118727 0.068833314
19/05/1992 463.58 1312.07
0.102607 0.034372118
19/06/1992 464.07 1248.12
0.001057 -0.048739778
19/07/1992 445.23 1168.05
-0.0406 -0.064152485
19/08/1992 434.33 1122.95
-0.02448 -0.038611361
19/09/1992 426.89 1204.37
-0.01713 0.072505454
19/10/1992 472.01 1206.68
0.105695 0.001918015
19/11/1992 486.88 1284.33
0.031504 0.064350118
19/12/1992 547.87 1333.41
0.125267 0.038214478
19/01/1993 554.31 1330.19
0.011755 -0.002414861
19/02/1993 516.13 1387.47
-0.06888 0.043061518
19/03/1993 520.6 1421.34
0.008661 0.024411339
19/04/1993 462.09 1387.43
-0.11239 -0.023857768
19/05/1993 455.15 1393.51
-0.01502 0.004382203
19/06/1993 479.94 1422.43
0.054466 0.020753349
19/07/1993 454.16 1408.73
-0.05372 -0.009631405
19/08/1993 511.67 1521.01
0.126629 0.079702995
19/09/1993 446.23 1494.29
-0.12789 -0.017567274
19/10/1993 405.57 1545.92
-0.09112 0.034551526
19/11/1993 387.72 1533.12
-0.04401 -0.008279859
19/12/1993 446.23 1640.19
0.150908 0.069837977
19/01/1994 473 1743.78
0.059991 0.063157317
19/02/1994 362.93 1703.02
-0.23271 -0.023374508
19/03/1994 384.75 1624.88
0.060122 -0.045883196
19/04/1994 355.99 1582.94
-0.07475 -0.025811137
19/05/1994 390.7 1571.99
0.097503 -0.006917508
19/06/1994 413.01 1515.01
0.057103 -0.03624705
19/07/1994 396.65 1540.95
-0.03961 0.017121999
19/08/1994 436.31 1598.16
0.099987 0.037126448
19/09/1994 432.34 1543.64
-0.0091 -0.034114231
19/10/1994 395.65 1524.39
-0.08486 -0.012470524
19/11/1994 417.47 1554.22
0.05515 0.019568483
19/12/1994 395.16 1505.86
-0.05344 -0.031115286
19/01/1995 416.48 1503
0.053953 -0.001899247
19/02/1995 413.5 1505.8
-0.00716 0.001862941
19/03/1995 423.91 1513.96
0.025175 0.005419046
19/04/1995 413.5 1556.15
-0.02456 0.027867315
19/05/1995 435.81 1605.78
0.053954 0.031892812
19/06/1995 441.27 1654.2
0.012528 0.03015357
19/07/1995 459.12 1674.67
0.040451 0.012374562
19/08/1995 465.56 1728.26
0.014027 0.032000334
19/09/1995 455.15 1745.57
-0.02236 0.010015854
19/10/1995 419.45 1757.31
-0.07844 0.006725597
19/11/1995 378.8 1769.5
-0.09691 0.006936739
19/12/1995 363.92 1754.28
-0.03928 -0.0086013
19/01/1996 413.5 1831.99
0.136239 0.044297376
19/02/1996 382.76 1843.95
-0.07434 0.00652842
19/03/1996 372.85 1835.38
-0.02589 -0.004647631
19/04/1996 358.47 1924.17
-0.03857 0.048376903
19/05/1996 382.76 1901.77
0.06776 -0.011641383
19/06/1996 388.71 1883.36
0.015545 -0.009680456
19/07/1996 370.86 1841.45
-0.04592 -0.022252782
19/08/1996 402.59 1908.96
0.085558 0.036661327
19/09/1996 371.85 1957.02
-0.07636 0.025176012
19/10/1996 353.01 1987.45
-0.05067 0.015549151
19/11/1996 362.43 1954.08
0.026685 -0.01679036
19/12/1996 375.82 1979.85
0.036945 0.013187792
19/01/1997 393.17 2061.07
0.046166 0.04102331
19/02/1997 313.35 2121.75
-0.20302 0.029441019
19/03/1997 325.74 2115.4
0.03954 -0.002992813
19/04/1997 324.26 2092.44
-0.00454 -0.010853739
19/05/1997 363.92 2211.91
0.122309 0.057096022
19/06/1997 358.96 2210.2
-0.01363 -0.000773088
19/07/1997 424.91 2284.14
0.183725 0.033453986
19/08/1997 437.3 2317.83
0.029159 0.014749534
19/09/1997 443.75 2362.31
0.01475 0.019190363
19/10/1997 461.6 2480.18
0.040225 0.049896076
19/11/1997 472.5 2285.91
0.023614 -0.078328992
19/12/1997 484.9 2361.28
0.026243 0.032971552
19/01/1998 499.28 2467.54
0.029656 0.045001016
19/02/1998 449.7 2647.24
-0.0993 0.072825567
19/03/1998 502.75 2797.33
0.117968 0.056696786
19/04/1998 477.96 2777.16
-0.04931 -0.007210447
19/05/1998 511.18 2794.62
0.069504 0.006286998
19/06/1998 515.64 2726.87
0.008725 -0.02424301
19/07/1998 525.06 2882.73
0.018269 0.057157107
19/08/1998 529.52 2646.95
0.008494 -0.081790525
19/09/1998 540.43 2354.83
0.020604 -0.110360982
19/10/1998 569.19 2348.1
0.053217 -0.002857956
19/11/1998 510.68 2567.36
-0.1028 0.093377624
19/12/1998 460.6 2607.39
-0.09807 0.015591892
19/01/1999 431.85 2730.74
-0.06242 0.047307844
19/02/1999 363.18 2764.7
-0.15901 0.012436189
19/03/1999 359.46 2847.18
-0.01024 0.029833255
19/04/1999 411.52 3010.25
0.144828 0.057274215
19/05/1999 407.06 2911.37
-0.01084 -0.03284777
19/06/1999 381.77 3028.03
-0.06213 0.040070482
19/07/1999 386.98 3030.3
0.013647 0.000749662
19/08/1999 406.81 2886.03
0.051243 -0.047609148
19/09/1999 409.29 2846.58
0.006096 -0.013669297
19/10/1999 373.34 2799.26
-0.08784 -0.016623457
19/11/1999 315.58 3033.78
-0.15471 0.083779285
19/12/1999 326.24 3150.24
0.033779 0.038387754
19/01/2000 349.05 3069.72
0.069918 -0.025559957
19/02/2000 288.31 2948.99
-0.17402 -0.03932932
19/03/2000 251.37 3126.18
-0.12813 0.060084978
19/04/2000 304.67 2937.83
0.212038 -0.06024925
19/05/2000 337.89 2892.43
0.109036 -0.015453583
19/06/2000 298.72 3095.44
-0.11593 0.07018666
19/07/2000 306.41 3102.86
0.025743 0.002397074
19/08/2000 322.27 3143.84
0.051761 0.01320717
19/09/2000 361.44 3084.07
0.121544 -0.019011782
19/10/2000 366.9 2977.26
0.015106 -0.034632807
19/11/2000 424.41 3085.5
0.156746 0.036355575
19/12/2000 409.54 3009.03
-0.03504 -0.024783666
19/01/2001 338.14 2992.06
-0.17434 -0.005639691
19/02/2001 381.77 2944.93
0.129029 -0.015751689
19/03/2001 369.87 2688.78
-0.03117 -0.086979996
19/04/2001 390.7 2818.19
0.056317 0.048129635
19/05/2001 421.44 2860.21
0.078679 0.014910279
19/06/2001 422.43 2753.8
0.002349 -0.037203562
19/07/2001 425.4 2628.57
0.007031 -0.045475343
19/08/2001 385.49 2590.61
-0.09382 -0.014441312
19/09/2001 366.9 2272.17
-0.04822 -0.122920856
19/10/2001 349.79 2406.13
-0.04663 0.058956856
19/11/2001 373.84 2578.75
0.068756 0.07174176
19/12/2001 347.31 2478.95
-0.07097 -0.038700921
19/01/2002 372.85 2487.99
0.073537 0.003646705
19/02/2002 404.58 2461.12
0.085101 -0.010799883
19/03/2002 392.18 2571.43
-0.03065 0.044821057
19/04/2002 394.66 2548.05
0.006324 -0.009092217
19/05/2002 386.23 2537.41
-0.02136 -0.004175742
19/06/2002 347.06 2270.73
-0.10142 -0.105099294
19/07/2002 317.32 1995.47
-0.08569 -0.121220929
19/08/2002 325.25 2128.84
0.024991 0.066836384
19/09/2002 308.89 1852.07
-0.0503 -0.130009771
19/10/2002 268.98 1973.16
-0.1292 0.065380898
19/11/2002 290.54 1966.6
0.080155 -0.003324616
19/12/2002 267.74 1850.02
-0.07847 -0.059279976
19/01/2003 244.93 1844.77
-0.08519 -0.002837807
19/02/2003 225.84 1762.53
-0.07794 -0.044580083
19/03/2003 235.01 1803.22
0.040604 0.023086132
19/04/2003 232.53 1867.76
-0.01055 0.035791528
19/05/2003 257.32 1915.87
0.10661 0.025758127
19/06/2003 256.83 2018.05
-0.0019 0.053333473
19/07/2003 260.79 2002.16
0.015419 -0.007873938
19/08/2003 288.31 2099.84
0.105526 0.04878731
19/09/2003 290.79 2111.57
0.008602 0.00558614
19/10/2003 271.7 2155.15
-0.06565 0.020638672
19/11/2003 295.75 2138.58
0.088517 -0.00768856
19/12/2003 300.21 2175.41
0.01508 0.017221708
19/01/2004 289.55 2244.62
-0.03551 0.031814692
19/02/2004 296 2253.94
0.022276 0.00415215
19/03/2004 294.76 2209.84
-0.00419 -0.019565738
19/04/2004 277.65 2264.9
-0.05805 0.024915831
19/05/2004 272.45 2217.22
-0.01873 -0.021051702
19/06/2004 277.4 2238.01
0.018168 0.009376607
19/07/2004 257.5 2157.19
-0.07174 -0.036112439
19/08/2004 257.5 2166.93
0 0.004515133
19/09/2004 278 2281.88
0.079612 0.053047399
19/10/2004 249 2308.58
-0.10432 0.011700878
19/11/2004 270.5 2370.35
0.086345 0.026756708
19/12/2004 266 2352.37
-0.01664 -0.007585378
19/01/2005 272.5 2422.06
0.024436 0.029625442
19/02/2005 300.5 2534.73
0.102752 0.046518253
19/03/2005 293.5 2476.21
-0.02329 -0.023087272
19/04/2005 291.25 2434.24
-0.00767 -0.016949289
19/05/2005 290.75 2472.76
-0.00172 0.015824241
19/06/2005 284.25 2544.59
-0.02236 0.029048513
19/07/2005 280 2600.39
-0.01495 0.021928877
19/08/2005 283.25 2661.32
0.011607 0.023431101
19/09/2005 283.5 2724.41
0.000883 0.023706281
19/10/2005 277.5 2587.2
-0.02116 -0.050363198
19/11/2005 288.5 2765.34
0.03964 0.06885436
19/12/2005 309 2803.53
0.071057 0.013810237
19/01/2006 305.25 2888.41
-0.01214 0.030276116
19/02/2006 318.75 2979.74
0.044226 0.031619472
19/03/2006 330 3062.18
0.035294 0.027666843
19/04/2006 341 3102.69
0.033333 0.013229137
19/05/2006 331 2884.1
-0.02933 -0.070451769
19/06/2006 324.75 2865.1
-0.01888 -0.006587844
19/07/2006 334 2932.45
0.028483 0.023507033
19/08/2006 359.5 3001.06
0.076347 0.023396818
19/09/2006 372.75 2982.91
0.036857 -0.006047863
19/10/2006 395.25 3149.97
0.060362 0.056005713
19/11/2006 410.5 3184.87
0.038583 0.011079471
19/12/2006 408.25 3206.5
-0.00548 0.006791486
19/01/2007 434.25 3229.02
0.063686 0.007023234
19/02/2007 512.75 3340.86
0.180771 0.034635896
19/03/2007 557 3220.5
0.086299 -0.036026652
19/04/2007 530 3345.25
-0.04847 0.038736221
19/05/2007 556 3449.69
0.049057 0.031220387
19/06/2007 581 3436.71
0.044964 -0.003762657
19/07/2007 592 3433.75
0.018933 -0.000861289
19/08/2007 520.5 3128.97
-0.12078 -0.088760102
19/09/2007 554 3319.35
0.064361 0.060844303
19/10/2007 582 3355.25
0.050542 0.01081537
19/11/2007 408 3135.95
-0.29897 -0.065360256
19/12/2007 425.5 3192.35
0.042892 0.017984981
19/01/2008 399.5 3003.52
-0.0611 -0.059150782
19/02/2008 381.5 3053.21
-0.04506 0.016543922
19/03/2008 325 2840.75
-0.1481 -0.06958578
19/04/2008 379.5 3090.06
0.167692 0.087762035
19/05/2008 366.25 3243.48
-0.03491 0.049649521
19/06/2008 322.5 2905.97
-0.11945 -0.104057987
19/07/2008 298.5 2735.72
-0.07442 -0.05858629
19/08/2008 326.75 2710.74
0.09464 -0.009131051
19/09/2008 370.25 2708.98
0.133129 -0.000649269
19/10/2008 250.5 2050.84
-0.32343 -0.24294753
19/11/2008 289.25 1998.02
0.154691 -0.0257553
19/12/2008 321 2141.1
0.109767 0.071610895
19/01/2009 332.5 2061.15
0.035826 -0.037340619
19/02/2009 336.75 2019.72
0.012782 -0.020100429
19/03/2009 308.5 1931.04
-0.08389 -0.043907076
19/04/2009 311.5 2096.6
0.009724 0.085736184
19/05/2009 346 2285.23
0.110754 0.089969474
19/06/2009 317.25 2211.91
-0.08309 -0.032084298
19/07/2009 316 2239.52
-0.00394 0.012482425
19/08/2009 313.2 2405.57
-0.00886 0.074145353
19/09/2009 335.1 2658.01
0.069923 0.104939786
19/10/2009 330.1 2715.26
-0.01492 0.02153867
19/11/2009 331.9 2695.15
0.005453 -0.007406289
19/12/2009 316 2653.36
-0.04791 -0.01550563
19/01/2010 339.5 2815.68
0.074367 0.061175265
19/02/2010 333.4 2741.54
-0.01797 -0.026331117
19/03/2010 333.1 2891.94
-0.0009 0.054859677
19/04/2010 344.8 2940.74
0.035125 0.016874486
19/05/2010 323 2662.27
-0.06323 -0.094693853
19/06/2010 331.7 2711.62
0.026935 0.018536813
19/07/2010 346.4 2658.05
0.044317 -0.019755718
19/08/2010 356.9 2690.81
0.030312 0.012324825
19/09/2010 385.4 2844.71
0.079854 0.057194674
19/10/2010 383.1 2947.99
-0.00597 0.036305985
19/11/2010 366.8 2959.82
-0.04255 0.004012904
19/12/2010 372.1 3044.15
0.014449 0.028491597
19/01/2011 380.8 3103.83
0.023381 0.019604816
19/02/2011 384 3154.1
0.008403 0.016196119
19/03/2011 351 2973.64
-0.08594 -0.057214419
APPENDIX 1.3b
REGRESSIONANALYSIS
SUMMARY OUTPUT
Regression Statistics Multiple R 0.393155 R Square 0.154571 Adjusted R Square 0.151625 Standard Error 0.07044 Observations 289
ANOVA
df SS MS F Significance
F Regression 1 0.260358339 0.260358 52.47244 4.03E-12 Residual 287 1.424039673 0.004962
Total 288 1.684398012
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.001231 0.004166711 0.295457 0.767858 -0.00697 0.009432 -0.00697 0.009432
X Variable 1 0.618599 0.085397227 7.243787 4.03E-12 0.450515 0.786684 0.450515 0.786684
Calculation: cost of equity, ke
CAPM Rf (given) equity beta Mkt risk premium equity beta x Mkt risk premium
4.20% 0.618599293 0.0546
0.033776
ke 7.58%
Share Price 19th 2011 Issued Shares
3.51 1872millions
Market value of ordinary shares: 351x1872 million = 6570.72 million
Net financial obligation
= 2215 million
APPENDIX 2.1
COMMON SIZE AND TREND ANALYSIS FOR SAINSBURYS IN PERCENTAGE
2008 2008 2009 2009 2010 2010 2011 2011
m m m m m m m m
Operating Income
Revenue
100
106.0212
111.9247
118.3046
Cost of sales -0.94 -94.52 -94.5802 -94.5029
Administrative Expenses -0.03 -0.97 -2.22 -96.7426 -2.00 -96.5788 -1.98 -96.479
Operating Income from Sales (before tax)
99.03
3.257363
3.42
3.52
Tax on Ordinary Activities -0.01 -0.94 -0.74 -0.89
Tax on Other Income 0.00 0.08 0.04 0.14
Tax on Financial Items 0.00 -0.14 -0.16 -0.11
Total Operating Tax
-0.01
-0.99
-0.86
-0.85
Operating Income from Sales (After tax) 0.02
-0.01
0.00
0.00
Other Operating Income (before tax)
Other Income 0.00 0.30 0.14 0.51
Less: Tax 0.00 -0.08 -0.04 -0.14 Share of Post-Tax loss from Joint Ventures 0.00 -0.59 0.69 0.28
Other Operating Income (After tax)
0.00
-0.37
0.79
0.65
Dirty Surplus Items of Operating Activities
Actuarial gains on defined benefit pension schemes
0.03
-4.77
-0.87
0.14
Less Tax impact on above item
-0.01
1.34
0.24
-0.01
Operating Income 0.04 -3.81 0.16 0.77
Less: Financing expense (income):
Finance expense -0.01 -0.78 -0.74 -0.54971
Finance Income 0.00 0.27 0.17 0.15
0.00 -0.51 -0.58 -0.40
Less: Tax benefit 0.00 0.14 0.16 0.11
0.00 -0.36 -0.41 -0.29 Dirty Surplus Items of Financial Activities:
Available-for-sale financial assets: Group 0.00 -0.08 0.22 0.07 Available-for-sale financial assets: Joint ventures 0.00 - 0.12 0.01
Cash flow hedge: Group 0.00 0.05 -0.02 -0.04
Cash flow hedge: Joint Venture 0.00 -0.17 - 0.01
Share based payment 0.00 - - - Less: Tax on the above components
of other comprehensive income 0.00 0.00 0.02 -0.5 -0.06 -0.15 -0.01 -0.25
Comprehensive Income to Ordinary Shareholders
0.04
-2.1
2.57
3.19
0.04
-2.1
2.57
3.19
APPENDIX 2.2a
SAINSBURYS REFORMATED INCOME STATEMENT FOR THE PERIODS 2008 2011
2008 2008 2009 2009 2010 2010 2011 2011
m m m m m m m m
Operating Income
Revenue
17837
18911
19964
21102
Cost of sales -16835 -17875 -18882 -19942
Administrative Expenses -502 -17337 -420 -18295 -399 -19281 -417 -20359
Operating Income from Sales (before tax)
500
616
683
743
Tax on Ordinary Activities -150 -177 -148 -187
Tax on Other Income 9 16.074 7.56 30.24
Tax on Financial Items -14.7 -27.072 -32.2 -23.52
Total Operating Tax
-155.7
-187.998
-172.64
-180.28
Operating Income from Sales (After tax) 344.3
428.002
510.36
562.72
Other Operating Income (before tax)
Other Income 30 57 27 108
Less: Tax -9 -16.074 -7.56 -30.24
Share of Post-Tax loss from Joint Ventures -2 -111 138 60
Other Operating Income (After tax)
19
-70.074
157.44
137.76
Dirty Surplus Items of Operating Activities
Actuarial gains on defined benefit pension schemes
542
-903
-173
29
Less Tax impact on above item
-151
253
48
-3
Operating Income 754.3 -292.072 542.8 726.48
Less: Financing expense (income):
Finance expense -132 -148 -148 -116
Finance Income 83 52 33 32
-49 -96 -115 -84
Less: Tax benefit 14.7 27.072 32.2 23.52
-34.3 -68.928 -82.8 -60.48
Dirty Surplus Items of Financial Activities:
Available-for-sale financial assets: Group -31 -16 43 14
Available-for-sale financial assets: Joint ventures 48 - 24 2
Cash flow hedge: Group 2 9 -3 -8
Cash flow hedge: Joint Venture -58 -32 - 2
Share based payment -10 - - - Less: Tax on the above components of other comprehensive income -1 -84.3 4 -103.928 -11 -29.8 -3 -53.48
Total Comprehensive Income(to Ordinary Shareholders) 670
-396
513
673
670
-396
513
673
APPENDIX 2.2b
TESCO'S REFORMATED INCOME STATEMENT FOR THE PERIODS 2008 2011
2008 2008 2009 2009 2010 2010 2011 2011
m m m m m m m m
Operating Income
Revenue
47298
54327
56910
60931
Cost of sales -43668 -50109 -52303 -55871
Administrative Expenses -1027 -1248 -1527 -1676
-44695 -51357 -53830 -57547
Operating Income from Sales (before tax)
2603
2970
3080
3384
Tax on Ordinary Activities -673 -788 -840 -864
Tax on Other Income 56.4 66.55 105.56 119.56
Tax on Financial Items -18.9 -
102.08 -87.92 -93.24
Total Operating Tax
-635.5
-823.53
-822.36
-837.68
Operating Income from Sales (After tax) 1967.5
2146.47
2257.6
2546.32
Other Operating Income (before tax)
Profit arising from Property-related items 188 236 377 427
Less: Tax -56.4 -66.55 -105.56 -119.6
Loss from operating activities
Share of post-tax profits of joint ventures and associates 75 110 33 57
Other Operating Income (After tax) 206.6 279.45 304.44 364.44
Dirty Surplus Items of Operating activities
Foreign currency translation differences 38 -275 343 -344
Total gain/Loss on defined benefit pension scheme 187 -629 -322 595
Tax relating to Components of other C.Income
54 -153
Tax on item taken directly to equity 123 435
Total Other operating Income
554.6
-189.55
379.44
462.44
Operating Income
2522.1
1956.92
2637.1
3008.76
Less: Financial Expense
Finance cost -250 -478 -579 -483
Finance Income 187 116 265 150
-63 -362 -314 -333
Less: Tax 18.9 -44.1 102.08 -259.92 87.92 -226.08 93.24 -239.76
Dirty Surplus Items of Financing activities
Change/Loss on revaluation of available-for-sale investments -4 3 1 2
Reclassified and reported in Group Income Statement -29 -334 5 8
Fair value Movements of Cash flow hedges 66 33 505 174 -168 -162 -22 -12
Total Comprehensive Income
2511
1871
2249
2757
Minority Interest
-11
-1
-27
-11
Comprehensive Income to ordinary shareholders 2500
1870
2222
2746
APPENDIX 2.3a
SAINSBURYS REFORMULATED GROUP BALANCE SHEET FOR THE PERIOD 2009-2012
2008 2008 2009 2009
2010 2010
2011 2011
m m m m
m m
m m
Operating Assets (OA)
Property Plant and Machinery
7424 7821
8203
8784
Intangible Assets
165 160
144
151
Investment in Joint Venture
148 288
449
502
Other Receivables
55 45
36
36
Retirement Benefit Assets
495 -
-
-
Inventories
681 689
702
812
Non-current assets held for sale
112 21
56
13
Trade and Other Receivables
206 195
215
343
Cash and cash equivalents
719 10005 627 9846
837 10642
501 11142
Less: Operating Liabilities (OL)
Trade and other payables
2280 2488
2466
2597
Current Provisions
10 19
13
11
Non-current Provisions
63 57
66
62
Taxes Payable
191 202
200
201
Other Payables
89 92
106
120
Deferred income tax liability
321 95
144
172
Retirement benefit obligation
- 2954 309 3262
421 3416
340 3503
Net Operating Assets(NOA)
7051
6584
7226
7639
Financial Assets (FA)
Available for Sales
106 97
150
176
Non-current derivative financial instruments - 31
20
29
Current derivative financial instruments 4 59
43
52
110 187
213
257
7161
6771
7439
7896
Less: Financial Obligations (FO)
Current Derivatives Financial Instrument liabilities 6 56
41
59
Non-Current Derivatives Financial Instrument liabilities 18 8
2
-
Borrowings: amount falling due within 1 year 118 154
73
74 Borrowings: amount falling due after more than 1 year 2084 2226 2177 2395
2357 2473
2339 2472
Net Financial Obligations (NFO)
2116
2208
2260
2215
Non- Controlling Interest (NCI)
-
-
-
-
Common Shareholders' Equity (CSE)
4935
4376
4966
5424
APPENDIX 2.3b
TESCO PLC REFORMULATED GROUP BALANCE SHEET
2008 2008
2009 2009 2010 2010
2011 2011
m m
m m m m
m m
Operating Assets (OA)
Goodwill and other Intangible Assets
2336
4027 4177
4338
Property, Plant and Equipment
19787
23152 24203
24398
Investment Property
1112
1539 1731
1863
Investment in Joint Ventures and Associates
305
62 152
316
Other Investments
4
259 863
1108
Deferred tax assets
104
21 38
48
Inventories
2430
2669 2729
3162
Trade and Other Receivables
1311
1798 1888
2314
Current Tax Assets
6
9 6
4
Cash
1542 28937
2112 35648 2062 37849
1785 39336
Less: Operating Liabilities (OL)
Trade and other payables
7277
8522 9442
10484
Customer Deposits
4538 4357
5074
Current Tax liabilities
455
362 472
432
Non-current Provision
23
67 172
113
Current Provision
4
10 39
64
Post-employment benefit Obligation
838
1494 1840
1356
Deferred tax Liabilities
802
696 795
1094
Other non-current payables
42
68 -
-
Deposits by banks
9441
24 15781 30 17147
36 18653
Net Operating Assets (NOA)
19496
19867
20702
20683
Financial Assets (FA)
Non-Current Derivative Financial Instruments-Assets
216
1478 1250
1139
Current Derivative Financial Instruments-Assets
97
382 224
148
Non-Current Loans and Advances to customers
1470 1844
2127
Current Loans and Advances to customers
1918 2268
2514 Current Loans and Advances to banks and other financial assets
2129 144
404
Short-term Investments
360
1233 1314
1022
Cash and Cash equivalents
246
1397 757
85
Non-current assets classified as held for sale
308 1227
398 10405 373 8174
431 7870
20723
30272
28876
28553
Less: Financial Obligations
Borrowings: amount falling due within 1 year
2084
4059 1529
1386 Borrowings: amount falling due after more than 1 year
5972
12391 11744
9689
Current Derivative Financial Instruments- and other Liabilities
443
525 146
255
Liabilities of the disposal group classified as held for sale
- -
-
Non-Current Derivative Financial Instruments- and other Liabilities 322 8821
302 17277 776 14195
600 11930
Net Financial Obligation (NFO)
11902
12995
14681
16623
Non-Controlling Interests
87
57
85
88
Common Shareholders' Equity (CSE)
11815
12938
14596
16535
APPENDIX 3.1a
SAINSBURY'S REFORMATED CASHFLOW STATEMENT FOR THE PERIODS 2008- 2011
2008 2008
2009 2009
2010 2010
2011 2011
m m
m m
m m
m m
Cash from Operating Activities ( C )
Cash generated from operations
998
1206
1206
1138
Corporation Tax paid
-64
-160
-89
-158
Tax on Interest
-28.2 -92.2 -32.43 -192.43 -26.04 -115.04 -28.89 -186.89
Dividend Received
- 905.8
3 1016.57
2 1092.96
1 952.11
905.8
1016.57
1092.96
952.11
Cash Investments (I)
Acquisition of and investment in Subsidiaries
-7
-10
-
-1
Purchase of PPE
-973
-966
-1036
-1136
Proceeds from disposal of PPE & other Assets
198
390
139
282
Proceeds from Sale of Intangible Asset
-
-
-
-
Purchase of intangible assets
-6
-10
-11
-15
Invested in joint ventures and associates
-31
-291
-2
-2
Cost of disposal of Operations
-1 -820
- -887
- -910
-872
Free Cash Flow C - I
85.8
129.57
182.96
80.11
Financial Flow to Claimants (F)
Interest Paid 123
128
111
126
Interest Received -29
-13
-18
-19
94
115
93
107
Tax On Interest -28.2 65.8 -32.43 82.57 -26.04 66.96 -28.89 78.11
Investment in Financial Assets
-
8
10
50
Repayments of Long-term Borrowing
36
30
74
61
Interest elements of Obligations under Finance Leases payments
3
3
3
4
Repayment of capital element of obligations under finance lease payment
-
-
2
3
Proceeds from Long-term borrowing
-
-152
-235
-45
Proceeds from Short-term borrowing
-
-43
-
-
Repayments of Short-term Borrowing
-
-
36
11
Increase/Decrease in Cash
-164 -59.2
-2 -73.43
235 191.96
-334 -171.89
Total Debt Financing
-59.2
-73.43
191.96
-171.89
Equity Financing (d)
Proceeds from Issuance of ordinary shares
-43
-15
-250
-17
Dividends Paid
178
218
241
269
Capital Redemption
10
-
-
-
Total Equity Financing
145
203
-9
252
Total Financing Flow (F+d)
85.8
129.57
182.96
80.11
APPENDIX 3.1b
TESCO'S REFORMATED CASHFLOW STATEMENT FOR THE PERIODS 2008- 2011
2008 2008
2009 2009
2010 2010
2011 2011
m m
m m
m m
m m
Cash from Operating Activities ( C )
Cash generated from operations
4099
4978
5947
5366
Corporation Tax paid -346
-456
-512
-760
Tax on Interest -84.6 -430.6 -133.104 -589.104 -170.52 -682.52 -136.08 -896.08
Dividend Received
88
69
35
62
Effect of foreign exchange rate changes
-55 3701.4
120 4577.896
49 5348.48
-46 4485.92
3701.4
4577.896
5348.48
4485.92
Cash Investments (I)
Acquisition of Subsidiaries
-169
-1275
-65
-89
Proceeds from sale of joint ventures and associates
-
-
-
-
Proceeds from sale of subsidiary
-
-
-
-
Purchase of PPE and Investment Property
-3442
-4487
-2855
-3178
Proceeds from sale of PPE
1056
994
1820
1906
Proceeds from Sale of Intangible Asset
-
-
4
3
Purchase of intangible assets
-158
-220
-163
-373
Invested in joint ventures and associates -61 -2774
-30 -5018
-4 -1263
-174 -1905
Free Cash Flow C - I
927.4
-440.104
4085.48
2580.92
Financial Flow to Claimants (F)
Increase in loans to joint ventures
36
242
45
219
Decrease in loans to joint ventures
-25
Investments in short-term investments
360
1233
1918
1264
Proceeds from sale of short-term Investments -
-360
-1233
-1314
Interest Paid 410
562
690
614
Interest Received -128
-90
-81
-128
282
472
609
486
Tax On Interest -84.6 197.4 -133.104 338.896 -170.52 438.48 -136.08 349.92
Increase in borrowings
-9333
-7387
-862
-2175
Repayments of Borrowing
7593
2733
3601
4153
New Finance Leases
-119
-
-
-
Repayments of Obligations under Finance Leases
32
18
41
42
Increase/Decrease in Cash
746 -487.6
1721 -1461.104
-690 3258.48
-949 1564.92
Total Debt Financing
-487.6
-1461.104
3258.48
1564.92
Equity Financing (d)
Ordinary shares issued for cash
-138
-130
-167
-98
Proceeds from sale of ordinary share capital to minority interests
-16
-
-
-
Dividends Paid
792
883
968
1081
Dividends Paid to Minority Interest
2
3
2
2
Own Shares Purchased
775
265
24
31
Other Adjustments
-
-
-
-
Total Equity Financing
1415
1021
827
1016
Total Financing Flow (F+d)
927.4
-440.104
4085.48
2580.92
APPENDIX 3.2a
ANALYST FORECAST AND MY PREDICTIONS
RBS Evolution Security PLC Santander
Own Outcome
2012 2012 2012 2012 2012 2012 2012 2012
m m
m m
m m m m
Operating Income
Revenue
22540
22085
22325.6
22007.67
Cost of sales
-21301
-20871
-21098.3 -20797.88
Administrative Expenses
-445.417 -21746.368
-436.425 -21307.3886
-441.18 -21539.52 -434.90 -21232.78
Operating Income from Sales (before tax)
793.63
777.61
786.08
774.89
Tax on Ordinary Activities
-199.743
-195.711
-197.843 -195.03
Tax on Other Income
29.99
29.39
29.71 29.29
Tax on Financial Items
-23.3283
-22.8574
-23.11 -22.78
Total Operating Tax
-193.08
-189.18
-191.24
-188.52
Operating Income from Sales (After tax)
600.55
588.43
594.84
586.37
Other Operating Income (before tax)
Other Income
115.3597
113.031
114.2624 112.64
Less: Tax
-29.99
-29.39
-29.71 -29.29 Share of Post-Tax loss from Joint Ventures
64.09
62.79
63.48 62.58
Other Operating Income (After tax)
149.45
146.44
148.03 145.93
Dirty Surplus Items of Operating Activities
Actuarial gains on defined benefit pension schemes
30.98
30.35
30.68
30.24
Less Tax impact on above item
8.05
7.89 7.98 7.86
Operating Income
789.04
773.11
781.53
770.40
Less: Financing expense (income):
Finance expense
-123.905
-121.404
-122.73 -120.98
Finance Income
34.18
33.49
33.86 33.37
-89.72
-87.91
-88.87 -87.61
Less: Tax benefit
23.33
22.86
23.11 22.78
-66.40
-65.06
-65.76 -64.83 Dirty Surplus Items of Financial Activities:
Available-for-sale financial assets: Group
14.95
14.65
14.81 14.60
Available-for-sale financial assets: Joint ventures
2.14
2.09
2.12 2.09
Cash flow hedge: Group
-8.55
-8.37
-8.46 -8.34
Cash flow hedge: Joint Venture
2.14
2.09
2.12 2.09
Share based payment
-
-
- -
Less: Tax on the above components of other comprehensive income
2.78 -52.94
2.72 -51.87 2.75 -52.43 -3.13 -57.53
Total Comprehensive Income(to Ordinary Shareholders)
736.10
721.24
729.10
712.88
736.10
721.24
729.10
712.88
APPENDIX 3.2b
SAINSBURYS 2012 ACTUAL OUTCOME
ACTUAL OUTCOMES
2012 2012
m m
Operating Income Revenue
22294
Cost of sales -21083 Administrative Expenses -419 -21502
Operating Income from Sales (before tax)
792
Tax on Ordinary Activities -201 Tax on Other Income 21.32 Tax on Financial Items -26.78 Total Operating Tax
-206.46
Operating Income from Sales (After tax)
585.54
Other Operating Income (before tax)
Other Income 82 Less: Tax -21.32 Share of Post-Tax loss from Joint Ventures 28 Other Operating Income (After tax) 88.68
Dirty Surplus Items of Operating Activities
Actuarial gains on defined benefit pension schemes
-222
Less Tax impact on above item 68
Operating Income
520.22
Less: Financing expense (income):
Finance expense -138 Finance Income 35
-103
Less: Tax benefit 26.78
-76.22
Dirty Surplus Items of Financial Activities:
Available-for-sale financial assets: Group 1 Available-for-sale financial assets: Joint ventures 2 Cash flow hedge: Group - Cash flow hedge: Joint Venture 2 Share based payment - Less: Tax on the above components of other comprehensive
income 2 -69.22
Total Comprehensive Income(to Ordinary Shareholders)
451
451
APPENDIX 4.1a
Ratio analysis for Sainsbury's:
Ratios (Level 3) 2008 2009 2010 2011
Asset Turnover (ATO) Drivers: PPE Turnover 0.42 0.41 0.41 0.42
Inventory Turnover 0.04 0.04 0.04 0.04
Account Receivable Turnover 0.01 0.01 0.01 0.02
Other Asset Turnover 0.09 0.06 0.08 0.06
Account Payable Turnover 0.13 0.13 0.12 0.12
Other Liabilities Turnover 0.04 0.04 0.05 0.04
1/ATO 0.40 0.35 0.36 0.36
APPENDIX 4.1b
Ratio analysis for TESCO PLC:
Ratios (Level 3) 2008 2009 2010 2011
Asset Turnover (ATO) Drivers:
PPE Turnover 0.42 0.43 0.43 0.40
Inventory Turnover 0.05 0.05 0.05 0.05
Accounts Receivable Turnover 0.03 0.03 0.03 0.04
Other Assets Turnover 0.12 0.26 0.24 0.25
Accounts Payable Turnover 0.15 0.16 0.17 0.17
Other Liability Turnover 0.05 0.14 0.15 0.14
1/ATO 0.41 0.47 0.44 0.42
12 January 2011
Price/Target:
Mkt Cap:
Net Cash/(Debt) (FY1)
390p/350p
7,470m
-2,706m
Sainsburys (SBRY.L) Reduce
What lies beneath
On the surface, headline Q3 LFL sales growth of 3.6% appears attractive. But, the underlying figures are much less impressive, reflect the industry slowdown and suggest that momentum is slowing. Most noticeably, the substantial extension program and last Januarys VAT rise are clouding the underlying trends. Stripping out these impacts, reported 3.6% ex- petrol LFLs would fall to c1.5%, suggesting flattish volumes. With underlying growth unimpressive, margin expansion limited and the industry outlook deteriorating, we see no reason why Sainsburys should command a 20% 2012 PE premium to the sector. We urge caution and rate the stock a Reduce with a 350p target price.
Results: Sainsburys delivered total sales growth of +7.5% slightly shy of our +8% estimate. Excluding petrol, total sales growth of 6.0% was also a touch behind our 6.5% forecast. LFLs of +3.6% were broadly in line. Although 3.6% headline growth appears higher than Morrisons 1%, we note that on the same definition, the growth rates are broadly similar.
Extension impact: With over 300k sq ft of extensions in this quarter (550k year to date), the underlying LFL picture is clouded by the inclusion of this additional space in LFLs. Sainsburys explained this extra space contributed c1% to growth. Last quarter extensions contributed 0.3% to LFL sales and going forward the impact will be even greater than the c1% reported today.
Industry outlook: Management were unequivocal in explaining the pervasive impact of inflation and on their concerns for the consumer outlook. They echoed Kantar in talking about a boost to non-food sales over Christmas as consumers moved away from the High Street due to accessibility and the adverse weather. This shift could cloud the underlying picture and see January sales disappoint as consumers revert back to the High Street.
Valuation: With industry concerns mounting and growth rates weaker than management suggest, Sainsburys 20% 2012 PE premium cannot be justified on fundamentals. We do not expect corporate activity to emerge and consequently, the balance of risk lies firmly to the downside. Reduce, 350p target price.
Year End Mar Sales (m) EBITDA (m) EVO PBT (m) EPS (p) DPS (p) Growth PBT (%) Growth EPS (%) P/E (x) EV/Sales (x) EV/EBITDA (x) Yield (%)
2008A 17,837 1,016 434 16.0 12.0 +28% +32% 24.4x 0.5x 9.0x 3.1%
2009A 18,911 1,084 519 20.5 13.2 +20% +28% 19.1x 0.5x 8.6x 3.4%
2010A 19,964 1,150 610 23.3 14.2 +18% +14% 16.8x 0.5x 8.4x 3.6%
2011E 21,047 1,263 654 25.1 15.3 +7% +8% 15.5x 0.5x 8.1x 3.9%
2012E 22,085 1,359 727 27.0 16.6 +11% +8% 14.4x 0.5x 7.8x 4.2%
Mar
PBT
EPS (p)
DPS (p)
P/E (x)
2010A
610
23.3
14.2
16.8x
2011E
654
25.1
15.3
15.5x
2012E
727
27.0
16.6
14.4x
600 550 500 450 400 350 300 250 200 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11
Price Price Relative to FTSE 100 Source: FactSet Estimates
Dave McCarthy
+44 (0)20 7071 4715 [email protected]
Andrew Porteous
+44 (0)20 7071 4441 [email protected]
EVO Securities makes markets in Sainsburys This publication was produced by Evolution Securities Limited (ESL). This publication is disseminated in the EEA by ESL. This publication is disseminated in the US by Evolution Securities US (ESUS); it has not been altered in any way by ESUS prior to distribution. ESUS is a wholly owned subsidiary of ESL. Under the Markets in Financial Instruments Directive and the Financial Services Authoritys Conduct of Business Rules, this document is a marketing communication and has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although it is not subject to any legal requirement prohibiting dealing ahead of the dissemination of investment research, Evolution Securities Ltd upholds this standard through its internal systems and controls.
The company has reviewed a draft of this research note and factual changes have been made
12 January 2011 Produced by: The Royal Bank of Scotland N.V.
Hold Target price
Sainsbury (J)
Good 3Q sales - as expected
Sainsbury reported a good 3Q11 sales performance although this had been expected. The trading and consumer environment is likely to remain challenging in 2011 but we believe that Sainsbury's business model (just like its UK peers), is strong enough to cope and to grow.
3.70 Price 3.90
Equity | United Kingdom | Food & Drug Retailers
Sainsbury has reported 3Q11 sales covering the 14 weeks to January 8 with total sales up by 7.5% or by 6% excluding fuel.
Lfl sales growth inc fuel was +5.4% but ex fuel and inc VAT lfl grew by 3.6%, which compares to our forecast of 4%. We believe that ex VAT (80bp) and adjusting for the extra week of trading in the quarter (30-40bp), lfl ex fuel and ex VAT rose by 2.3-2.4%.
Extensions are likely to have contributed at least 50bp to the lfl sales performance.
New space contributed 2.4% to sales growth (ex fuel) which compares to our 2.5% forecast.
Total Non-Food sales grew at three times the rate of food and we estimate that this means that Non-Food grew sales by c15% and Food by 5%. Seasonal, Clothing, Home, Electrical and entertainment all contributed strongly to the non-food growth rate while at the same time Sainsbury's Online and Convenience businesses 'continued to perform well'.
The outlook statement is as we had expected, with Sainsbury being 'well placed to make continued good progress in 2011' despite the challenging consumer environment.
We like Sainsbury and we are positive on the continued development of its business model and indeed, we forecast FY10-FY13 EPS CAGR of 10% and over the same period, and despite over 3bn of capex forecast by us, we expect after-tax ROIC to increase by 90bp from a lowly 6.8% in FY10 to 7.7% by FY13. Thus, while we forecast annual incremental after-tax returns of 12-13%, our FY13 ROIC is still just close to Sainsbury's cost of capital.
We changed our recommendation on the shares from Buy to Hold in September 2010 as the share price had achieved our 370p price target. One area where our forecasts could be wrong is the in-store EBIT margin, which we currently forecast to rise by 60bp between FY10-FY13 and to put this into context, each incremental 10bp on top of our FY13F in-store EBIT margin is worth on an NPV basis, around 8p per share to our valuation.
With the shares trading on a CY11F PE and EV/EBITDAR of 13.9x and 9.3x respectively, we do not see much, indeed if any, near-term scope for further multiple expansion. these valuations compare to Morrison's trading on 11.0x and 6.4x and Tesco on 11.8x and 8.5x respectively.
The conference call starts at 8.45am.
Analysts
Justin Scarborough +44 20 7678 0748 [email protected]
Mark Irvine-Fortescue +44 20 7678 2602 [email protected]
John Guy +44 20 7678 3665 [email protected]
Kate Heseltine +44 20 7678 9085 [email protected]
250 Bishopsgate, London, EC2M 4AA, United Kingdom
http://research.rbsm.com Important disclosures can be found in the Disclosures Appendix.
Income statement
m Revenue Cost of sales Operating costs EBITDA DDA & Impairment (ex gw) EBITA Goodwill (amort/impaired) EBIT Net interest Associates (pre-tax) Other pre-tax items Reported PTP Taxation Minority interests Other post-tax items Reported net profit Tot normalised items Normalised EBITDA Normalised PTP Normalised net profit
Source: Company data, RBS forecasts
FY09A 18911 -14577 -3250 1084 -468.0 616.2 n/a 616.2 -89.0 15.7 -77.0 465.9 -177.0 0.00 0.00 288.9 -79.0 1084 518.9 367.9
FY10A 19964 -15372 -3442 1150 -479.0 671.0 n/a 671.0 -103.4 18.4 147.0 733.1 -148.3 0.00 0.00 584.8 148.8 1150 610.1 436.0
FY11F 21320 -16484 -3591 1246 -492.7 753.1 n/a 753.1 -99.7 20.7 26.4 700.4 -210.1 0.00 0.00 490.3 21.6 1246 671.1 468.7
FY12F 22540 -17396 -3778 1365 -520.0 845.5 n/a 845.5 -95.3 23.9 28.9 803.1 -240.9 0.00 0.00 562.2 28.2 1365 766.7 533.9
FY13F 23793 -18333 -3989 1471 -548.0 922.7 n/a 922.7 -89.5 27.5 33.7 894.3 -268.3 0.00 0.00 626.0 37.4 1471 848.2 588.6
year to Mar
Balance sheet
m Cash & market secs (1) Other current assets Tangible fixed assets Intang assets (inclgw) Oth non-curr assets Total assets Short term debt (2) Trade &oth current liab Long term debt (3) Oth non-current liab Total liabilities Total equity (incl min) Total liab&sh equity Net debt
Source: Company data, RBS forecasts
FY09A 627.0 964.0 7821 191.0 430.0 10033 210.0 2709 2185 553.0 5657 4376 10033 1768
FY10A 837.0 1016 8203 164.0 640.5 10860 114.0 2679 2359 742.5 5894 4966 10860 1636
FY11F 837.0 1150 8654 151.0 635.0 11427 114.0 2835 2532 757.6 6238 5189 11427 1809
FY12F 837.0 1223 9073 138.0 649.4 11921 114.0 2985 2559 801.1 6459 5462 11921 1836
FY13F 837.0 1298 9467 125.0 648.8 12376 114.0 3139 2530 832.4 6615 5761 12376 1807
year ended Mar
Cash flow statement
m EBITDA Change in working capital Net interest (pd) / rec Taxes paid Other oper cash items Cash flow from ops (1) Capex (2) Disposals/(acquisitions) Other investing cash flow Cash flow from invest (3) Incr / (decr) in equity Incr / (decr) in debt Ordinary dividend paid Preferred dividends (4) Other financing cash flow Cash flow from fin (5) Forex& disc ops (6) Inc/(decr) cash (1+3+5+6) Equity FCF (1+2+4)