J Sainsbury's PLC (Ticker symbol: SBRY) is a British chain of supermarkets operating in the United Kingdom. In 1869, the company was established with just a shop in Drury Lane, London by John James Sainsbury. It went on to become the largest retailer in groceries, before being taken over by Tesco, and currently is the second largest chain of supermarkets in the United Kingdom. The company engages in grocery-related retailing and retail banking with interests in property as well. More than 90,000 products are sold at the company’s store, with more than 185,000 colleagues employed by the group. Qatar Holdings LLC is the largest shareholder of the company with 21.99% of shares. Mike Coupe was appointed as the Chief Executive Officer in July 2014 and has served in the Operating Board since October 2004. The company sources products from 70 countries and is connected with suppliers around the world to deliver fresh food, groceries, general merchandise and clothing to the company’s store and online customers through 33 distribution centres. The group has 2,200 Sainsbury’s supermarkets, convenience stores and Argos stores across the UK and Ireland and an established online capability, which now accounts for around 20 per cent of food orders.

Segments
The group’s operations are differentiated into four operating segments: Retail – Food, Retail – General Merchandise and Clothing, Property Investment and Financial Services. The two retails segments are combined into one ‘retail’ segment for reporting purpose. The Retailing segment, which is the biggest segment of the company, engages in the operation of supermarkets and convenience with additional operations in general merchandise and clothing retailers. The Financial Services segment of the group includes Sainsbury’s Bank and Argos Financial Services which together have 3.9 million active customers.

Brands
The company's brands include Sainsbury's groceries, Argos, Tu, Sainsbury's Home, Habitat and Sainsbury's Bank. Sainsbury's groceries have become one of the UK's largest food retailers with an increasing online presence, with nearly 250,000 online orders every week. The brand also has over 600 supermarkets, 800 convenience stores under its name. Argos is amongst the UK's leading catalogue retailer, offering more than 60,000 products online and in-store, to serve 29 million store customers and nearly a billion online visitors every year. Tu, introduced in 2016, is the group's exclusive clothing range and has a presence in over 190 stores. It is the 10th biggest clothing retailer in the UK by value.
  
 
Key Statistics

Acquisition of Asda
On April 30, the grocery giant announced an agreement to buy its competitor, Asda, the UK arm of Walmart. The merged company will overtake the current market leader to become the UK’s biggest supermarket chain. The deal is worth £7.3 billion, and Walmart will hold 42% of the combined business equity. The merged companies will have around 2,800 stores under its name with more than 333,000 workers, and a combined market share of 31.4%, more than 27.6% held by Tesco. The combined business is expected to generate at least £500 million in cost savings and result in a fall in prices of about 10%. However, on 20^th February, the UK’s competition regulator, Competition and Markets Authority (CMA), in its preliminary verdict on the acquisition, said that consumers might have to face lower choices and higher prices due to the merger. It also said that it could block the acquisition or may ask the brand to sell numerous stores or even one of the brand names. It also notes that it might be tough for the retail chains to address the concerns, effectively questioning the success of the merger.

Key Financial Metrics (H1 FY2019, in £m)

(Source: Company Fillings)

Financial Highlights (Six Months ending 30 September 2018)
Group sales increased by 3.5 per cent over the last year to reach £16,884 million. The revenue was boosted by increased sales of food and general merchandise which was in turn helped by the high temperature in the summers. Retail sales (excluding fuel) rose by 1.2 per cent over the previous year, and like-for-like sales (excluding fuel) increased by 0.6 per cent, mainly driven by continued retail price inflation and like-for-like transaction growth. The retail underlying operating profit rose by 23.2 per cent to £335 million in H1 FY 2019, against £272 million in H1 FY 2018. The underlying profit before tax up by 20.3 per cent over the last year to £302 million and profit after tax decreased by 13 per cent to £144 million. Bank's profits remained in line with guidance; it fell by 53 per cent over the last year to £16 million, mainly due to fall in interest margin, a rise in impairment costs from IFRS 9 and Tier 2 interest costs. The underlying profits were reported at £302 million for the first half of FY 2019, up by £51 million over the year. The growth was mainly due to reduced interest costs and synergies with a reliable food performance. The underlying earnings per share increased by 18.4 per cent over the previous year to 10.3p. The retail free cash flow rose by £183 million year-on-year to £619 million, driven by excellent cash generation and bank capital injections' timing. Net Debt was £834 million, reflecting a decline of £530 million and core retail capital expenditure of £216 million was reported, against £239 million in the prior year. The interim dividend of 3.1 per share was announced, in line with the company's policy of announcing 30 per cent of the full dividend paid in the prior year.
 
Financial Ratios

(Source: Thomson Reuters)

Ratios Commentary
The profitability margins of the company are lower as compared to its peers is lower, with no significant improvement over the periods. However, retail underlying operating margin increased by 36 basis points to 2.25 per cent in the first half of FY 2019, against 1.89 per cent in FY 2018, principally driven by delivery of Argos' synergies. At constant fuel prices, the improvement was to a 39-basis point increase. The liquidity position is roughly in line with the industry median and has remained stable over the periods. The liquidity position saw a slight fall in the first half of FY 2019. The company is less leveraged than its peers. Moreover, the debt declined in the latest reported period.
 
Valuation Methodology

Method 1: Price/Earnings Multiple Approach (NTM) (EPS (FY19E) approximately)


Method 2: Price/Cash Flow Multiple Approach (NTM)  


To compare Sainsbury’s with its peers, Price/Cash Flow has been used. The peers are Rite Aid Corp(NTM P/CF was 2.09), George Weston Ltd (NTM P/CF was 4.11),Ceconomy AG (NTM P/CF was 4.27), Metro AG(NTM P/CF was 5.81),WM Morrison Supermarkets PLC(NTM P/CF was 6.74) and Tesco PLC(NTM P/CF was 7.71). The median of Price/Cash Flow (NTM) of the company’s peers was 5.04x.
 
* All forecasted figures and Peer selection have been taken from the Thomson Reuters. 
 
Share Price Performance

Daily price chart as on March-07-2019, before market close (Source: Thomson Reuters)

On 7th March 2019, at the time of writing (before market close), SBRY shares were trading at GBX 230.5, down by 0.64 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 341.80/GBX 224.70. At the time of writing, the share was trading 32.12 per cent lower than its 52w High and 3.25 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 10,580,660.80; 30 days - 8,986,987.17 and 90 days - 7,860,228.48; the average traded volume for 5 days was up by 17.73 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 11.3x as compared to the industry median of 16.5x. The company’s stock beta was 1.06, reflecting relatively same directional movement of stock with the index. The outstanding market capitalisation was around £5.11 billion
and a dividend yield of 3.9 per cent.
 
Risks Assessment and Growth Prospects
The acquisition of Asda is still under regulators purview; any decision will affect the company's financials. Moreover, the grocery, clothing and general merchandise markets remain a very competitive and marketing-centred industry, straining the margins. This combined with growing inflationary cost pressures may adversely impact performance. However, the company is on track to meet the market consensus for a full-year profit of £634 million. Additionally, the company is expected to deliver at least £500 million of cost savings over the next three years as the company look to simplify the structure and realise efficiencies. The company reported significant Argos EBITDA synergies of £63 million, 9 months prior to the original schedule. Fluctuations in interest, commodity and foreign currency rates can increase input costs which the group may not be able to pass on to the consumers. Pressure is also building up from consumers' preferences are shifting towards the online marketplace.

Conclusion
The growing cost-cutting has led to an increase in efficiencies. This, coupled with the company's focus on synergies from Argos, has resulted in strong financial performance. Keeping up-to-date with the trend, the company is increasingly pushing into the online marketplace, which has been growing at an impressive pace. Based on strong fundamentals and the valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 232, as at Mar-06-19 with double-digit upside potential based on 5.04x NTM Price/Cash Flow on FY19E cash flow per share and 15.20x NTM Price/Earnings on FY19E earnings per share.

*The buy recommendation is valid for the current price as covered in the report as on (7th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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