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Sainsbury - underlying profit and dividend rise

George Salmon | 1 May 2019 | A A A
Sainsbury - underlying profit and dividend rise

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Sainsbury (J) plc Ordinary 28,4/7p

Sell: 199.00 | Buy: 199.15 | Change -2.90 (-1.43%)
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Sainsbury has reported a 4.2% increase in underlying operating profit to £723m, which is ahead of market expectations. Although one-off costs, including expenses related to the failed Asda deal, meant reported profits fell to £312m, from £518m last year.

The full year dividend also rose 7.8%, to 11p.

The shares rose 5.4% following the announcement.

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Our view

With the Asda fiasco now firmly put to bed, focus is now squarely on Sainsbury's core performance.

Unfortunately for the group, its performance isn't quite as exciting as a merger would have been.

The group was relying on the merger to help it stand out in a crowded market place. Aldi and Lidl offer customers cheaper alternatives, then there are more upmarket offerings like Waitrose, M&S Food and Ocado. And with the latter two teaming up to boost M&S' online footprint, competition is at fever pitch.

A place in the middle of the pack has its merits, but pressure from above and below is putting the squeeze on. And unlike Tesco, margins aren't expected to move much beyond their current 2.5% level.

But there are bright spots on the horizon. Sainsbury's beat guidance to deliver cost savings of £220m in the year, with synergies from the Argos integration coming in ahead of schedule. The online business continues to grow strongly too, with sales there helping to offset more difficult conditions in the main stores.

The prospective yield is now 4.8%, so investors are likely to be paid to wait while the group decides its next steps. But it's worth remembering the dividend is linked to earnings - Sainsbury will need to find a way to increase profitability if that payout is to materially rise in the future and cost savings can only take it so far.

With the Asda deal off the table, Sainsbury's on its own in its bid to revitalise. It's still a reasonably good business in its own right, but in an age of increasing competition, and with the door potentially ajar for a third party to swoop in and take the reins at Asda, 'good' won't always be 'good enough'.

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Full year results

Gross revenue rose 2.1% to £32.4bn, including VAT. However, like-for-like (LFL) sales declined 0.2%, following a weaker fourth quarter in food and clothing sales.

In Retail, an improved margin helped underlying profits increase 10.7% to £692m. Grocery sales were up slightly to £19.5bn, driven by increased prices and an improved sales mix. However, the rate of growth in convenience stores slowed to 3.7% from 7.5%, as less stores were opened in the year.

Within clothing, sales fell 0.8% to £953m due to reduced promotional activity, and General Merchandise sales were flat year-on year at £6.6bn.

As expected, profits from Sainsbury's bank more than halved to £31m due to an increase in bad debt and an increase in costs.

Sainsbury's achieved its target of £160m of cash synergies from the Argos deal 9 months ahead of schedule, while exceptional costs associated with the integration were in line with guidance at £276m.

Capital expenditure for the year was £75m lower at £554m. That helped free cash flow improve 6.7% to £461m and net debt reduce by £222m to £1.6bn.

Capex is expected to be around £550m next year, and Sainsbury said it will target reducing net debt by at least £600m over the next three years.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.