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Questor: Sainsbury’s shares are back at 2003 levels. Does that make them a bargain?
Questor share tip: the collapse of the Asda merger has prompted a share price slide so it’s time to decide if we should buy back in
After a torrid few weeks for Questor, during which we’ve had to advise readers to sell several stocks – Indivior, Saga and Sophos, for example – at a painful loss, it is a relief to be able to report today on a call we got right.
We advised readers to sell Sainsbury’s at 314.5p a year ago, booking a profit of almost 20pc in the process, when its proposed merger with Asda was announced.
Our thinking was that seeking regulatory clearance for such a large and controversial deal was bound to be a massive distraction to management in a ruthlessly competitive market where it’s vital to be on top of every detail at all times.
The competition regulator blocked the deal last month. Patrick O’Brien of GlobalData, a research firm, said Mike Coupe, Sainsbury’s chief executive, had “wasted a year chasing an impossible dream while its competitors took full advantage”.
Sainsbury’s shares closed at 216p, a level not seen since 2003, on the day of the ruling. They have since declined further to 206.9p.
This prompts us to ask whether the share price has fallen too far, especially as the other potential danger of the deal about which we warned, the uncertainties involved in integrating two giant businesses, has now disappeared.
On paper, the stock looks cheap: it trades at just 9.4 times earnings for the year to March, while the yield is a hefty 5.3pc. What is more, underlying profits before tax rose by 7.8pc to £635m, according to preliminary annual results published on May 1, although the statutory figure fell by 41.6pc to £239m because of various costs such as those involved in the integration of Argos.
The full-year dividend was increased by 7.8pc to 11p per share, while net debt fell by £222m to £1.6bn.
However, we are concerned by the effects of Sainsbury’s “lost year”, which may not yet be fully felt, its need to come up with a new strategy quickly now that the Asda deal has collapsed, and the fact that the company is led by a chief executive who may not be able to recover from the merger debacle.
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If he is forced out, the company would then face the additional distraction of finding a replacement. All of this comes against the background of a fast-changing market full of able and ambitious operators, such as the discounters Aldi and Lidl, online grocers and a resurgent Tesco.
Food retail is a market where you have to run fast just to stay still, and Sainsbury’s looks saddled with too many handicaps at present. Questor prefers Tesco, because we believe that its recovery plan is based on strong foundations, although we also have a hold rating on Morrisons.
We will continue to steer clear of Sainsbury’s.
Questor says: avoid
Ticker: SBRY
Share price at close: 206.9p
Update: Galliford Try
This column has been less fortunate with Galliford Try, the housing and contracting firm. We tipped the shares at £13.29 in August 2017 and they now stand at 554.5p. However, the loss is not as bad as it looks because the company conducted a rights issue last year, which complicates things. By our calculations our actual loss is a still significant 45pc.
Investors have punished the company because of cost overruns on projects in the construction arm, notably the Aberdeen bypass and the Queensferry bridge over the Firth of Forth. The firm also lost its chief executive to a rival in March.
“This resignation, the new losses in construction and the announcement of a restructuring of this division came as a complete surprise to investors,” said Gaspar Ariño of Montanaro Asset Management, which holds shares in Galliford. “Investors have lost confidence in the management team, sentiment towards the shares is awful and their price-to-earnings ratio is at an all-time low. The new chief executive is the previous finance chief and I simply don’t trust him.”
Ariño added that “the stock looks cheap on any measure – p/e ratio, yield, sum of its parts”. Montanaro has reduced its holding and is looking for an opportunity to get out completely. However, it said the shares were “too cheap to sell” at present. We will report developments. Hold for now.
Questor says: hold
Ticker: GFRD
Share price at close: 554.5p
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