J Sainsbury is leading the FTSE 100 fallers as analysts express caution ahead of Wednesday’s results and strategic review, with worries about the supermarket’s dividend.
Its shares have lost 6.1p to 255.5p, and David McCarthy at HSBC said:
Sainsbury surprised recently when it said it would present a strategic review alongside its interims. There is a new chief executive [Mike Coupe], so a review is reasonable, but the new chief executive was number two to previous chief executive Justin King, hence the surprise.
In recent weeks, we have seen Sainsbury launch its joint venture with Netto, announce it is halving the pay-out of Nectar points and say the market is changing faster than at any point the chief executive can recall.
But what are his options? The market is getting tougher, Tesco is getting more robust and consumers are more demanding. This means that Sainsbury must improve its offer and this will cost money (reducing Nectar points is weakening its offer and suggests a reallocation of resources). We expect to hear about re-engineering, cost cutting, and productivity opportunities, but with sales densities falling, cost ratios rising and gross margins restricted due to competitive pressures, then we see little prospect for growth. When a company is threatened - it can defend margins or sales but not both. We remain underweight with a discounted cash flow derived target price of 220p.
[As for the interims} we expect pretax profit down around 7% and earnings per share down around 10%. Like for like sales were down in the second quarter (by around 3%) and this will be putting pressure on profits. The dividend (6.6% historic yield) is under threat but “will be the last to go”, so a cut would signal deep concern by management.
[On the] strategic review we expect management to distance itself from price wars, but if Tesco improves prices and quality, then Sainsbury will be strategically threatened through its lack of relative scale. Even if only a minority of customers are price sensitive, then losing a proportion of these will have disproportionate impact on profits.
Meanwhile Mike Dennis at Cantor Fitzgerald cut his target price, saying:
Our view that the full year dividend will be cut to 12p and the yield to 4.5% and investors will need further reassurance on full yea profits and the UK trading strategy. The risk now is that Tesco can release significant cash from asset sales, cost savings and lower their cost of goods by shortening supplier payment days to reset UK pricing and take back market share. We maintain our hold recommendation and reducing our target price to 275p (from 320p).
