THINGS are looking decidedly brighter at J Sainsbury, the supermarket group. The growth in sales reported yesterday may not have looked like much in absolute terms, especially when the flattering effect of petrol revenues is set aside. But in the context of the poor performances dished up in recent years, the figures were quite encouraging. They were encouraging enough for Justin King, the chief executive who is now within a week of completing his first year in charge of the grocer, to suggest that the long awaited recovery had started.
It is not before time. Over the past five years overall sales at Sainsbury’s have barely budged. And without wanting to belittle Mr King’s achievements so far or the extent of his ambition, Sainsbury’s will be shown to have done little more than stand still in sales terms across the first eight years of the 21st century. Tesco, it is interesting to note, achieved sales of £18.8 billion in 2000, about £2 billion more than Sainsbury’s. But in the year to February 22, 2004 Tesco sold nearly £31 billion worth of goods and services. By 2008 Tesco is likely to be selling at least twice as much as Sainsbury’s. Considering that Tesco sales rose 18 per cent in the last financial year and are showing no sign of slowing, it could be considerably more.
Fortunately for Sainsbury’s and its long-suffering shareholders, profit is more important than sales. The sales growth that Sainsbury’s will win in the next couple of years, aided and abetted by a blend of overhead reduction and efficiency enhancement, should drive profits. The consensus of analysts’ opinion suggests that Sainsbury’s profits will rise 28 per cent next year. Tesco is on course to achieve a more modest 11 per cent growth in profits, but since it is growing from a bigger base the net addition to Tesco profits will be more than three times the uplift at Sainsbury’s.
Why is this important? Because the bigger you are the more price competitive you can be. And because the sales momentum established at Tesco makes it ever so difficult for Sainsbury’s to compete. And because it makes the very different share price ratings of the two companies look decidedly odd. The Tesco p/e is 15 while the Sainsbury’s equivalent is 27. Sainsbury’s predicament also makes one wonder just who would want to make a takeover bid. Avoid.
Premier Oil
TOP brass at Premier Oil, the oil exploration and production company, are feeling short changed. Led by Simon Lockett, who replaced Charles Jamieson as chief executive yesterday, they reckon that the £450 million market value of the company reflects either the exploration opportunities or the production capabilities. But not both.
They have a point. Results published yesterday showed that the company has 177 million barrels of oil equivalent — most of which is gas. With oil at $50 a barrel that is worth £4.5 billion. Of course Premier has to get the oil sucked out of the ground and that will cost it somewhere in the region of $6 a barrel. It also has to find the reserves and spend on developing production facilities which adds another $7.50 a barrel. And then there is the tax, which depends on where in the world you are drilling, but is probably 50 per cent of the price of a barrel. That $50 a barrel quickly falls, therefore, but at current prices Premier is still netting about $11.50 a barrel and that translates into an asset value of just over £1 billiion, more than twice the market value of the quoted company. You could reasonably want to cut that sum in half to take account of the risk that the oil price will fall or operating costs will rise. But if you did, Premier’s exploration activities would still be in the price for nothing.
The calculations are very sensitive to the price of oil and gas. More troublingly, Premier’s stated strategy is to use the cash generated by hydrocarbon producing assets to fund the exploration actitivities. Since the income from the 177 million barrels of reserves is spoken for it is hard to see why the proven assets should have any bearing on Premier’s market value.
Premier’s exploration opportunities may well prove to have value in excess of £450 million of course. If the price of the black stuff stays stubbornly higher than many are prepared to admit at present — and it may — shares in the company could prove a bargain at current levels. The risks involved are compounded by Premier’s policy of not paying dividends. A dividend discipline would help to assuage doubts. Avoid.
Country & Metropolitan
COUNTRY & Metropolitan yesterday revealed a 300p a share recommended bid from Gladedale, a private property group backed by HBOS. By the close of play yesterday Gladedale controlled more than 50 per cent of the shares in the small housebuilder, indicating the bid is almost certain to be successful. It looks like a good offer.
Shares in the company were already close to a 12-month high back in February before the bid approach was first announced. The City warmed to the company’s decision to move away from premium housing towards low-cost starter homes, valued at about £100,000.
Yesterday the company said that pre-tax profits soared 25 per cent in the first half of the year and in its chosen field there remains plenty of room for more growth. Gordon Brown’s decision to raise the stamp duty threshold to £120,000 will help sales by reducing costs for buyers. Nevertheless the bid price from Gladedale represents a mouthwatering 81 per cent premium to net asset value.
Admittedly there is no up-to-date valuation of the land portfolio. But the fact that Stephen Wicks, the group’s 53-year-old founder, is willing to sell his 11 per cent stake netting him a £10 million windfall, indicates that the management believe the deal is good value. If the transaction goes through, Wicks will leave the company and start a new land business with Nish Malde, the finance director. Shareholders can happily accept the terms being offered here and watch out for the chance to reinvest in the new Wicks/Malde vehicle.
