J Sainsbury Plc

J Sainsbury Plc (LON: SBRY) is an FTSE 100 index listed company, that operates and manages a chain of supermarkets in the United Kingdom. It offers general merchandise, food, clothing and financial services.

On 4 November 2021, SBRY would announce its H1 FY2022 results.

The next dividend of GBX 7.40 per share would be paid on 16-July-2021 (final dividend).

Investment Rationale for Valuation – SELL at GBX 282.30

• The management could not provide detailed guidance for FY2022 due to macroeconomic uncertainties.
• Global supply challenges could continue for FY2022 as per the management, increasing costs for the Company.
• On the profitability front, the net margin in FY2021 has been lower than the industry median of 1.1%.
• On the liquidity front, the current ratio since FY2019 has been lower than the industry median of 0.81x.
• On the leverage front, the debt/equity ratio in FY2021 has been higher than the industry median of 0.92x.
• In the last year, the stock generated a decent return of about 48.51%, offering investors an opportunity to book a decent profit.
• The stock is trading very near its 52-week high price, raising doubts about its upside potential.

Key Risks

• Due to Brexit related uncertainties, labour costs could potentially rise, affecting the financials of the Company.
• Due to the payment of dividends, there could be stress on SBRY’s liquidity.
• Due to competition from discount retailers, market share could diminish further, affecting the margins of SBRY.

Q1 FY2022 Trading Update (released on 6 July 2021)

(Source: LSE Website)

• Driven by higher in-home consumption due to continued COVID-19 restrictions, grocery sales were up 0.8% YoY in Q1 FY2022.
• Due to global supply challenges, General Merchandise sales were down 1.4% YoY in Q1 FY2022.
• Driven by strong growth in seasonal and womenswear ranges, clothing sales surged 57.6% YoY.
• These led to Q1 FY2022 like-for-like sales up 1.6% excluding fuel and total retail sales increasing 1.6% excluding fuel.

One Year Share Price Chart

 (Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

There are continuing macro uncertainties in FY2022 with potential disruptions in the supply chain. Also, the delta plus Covid-19 variant could pose further restrictions. The management could not provide detailed guidance for FY2022.  Meanwhile, the stock is trading very close to the 52-week high of GBX 279.80. The stock made a 52-week low and high of GBX 172.32 and GBX 283.40, respectively. 

Considering the macroeconomic uncertainty, poorer profitability, liquidity and leverage position of the Company than the industry, lack of detailed guidance from the management, and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on J Sainsbury Plc at the current market price of GBX 282.30 (as of 7 July 2021 at 10:35 AM GMT), while we will revisit our stance based on the analysis of future corporate announcements released by the Company. 

Brewin Dolphin Holdings Plc

Brewin Dolphin Holdings Plc (LON: BRW) is an FTSE 250 index listed company that is engaged in the business of wealth management. BRW provides services such as direct online investments and wealth management.

On 23 July 2021, BRW would provide its Q3 FY2021 trading update.

The last dividend of GBX 4.60 per share was paid on 11-June-2021 (interim dividend).

Investment Rationale for Valuation – SELL at GBX 367.00

• As per the management, commission income is expected to decline, and operating costs are expected to increase in H2 FY2021.
• The market conditions remain challenging, with the delta variant of Covid-19 could dent market recovery and consumer confidence.
• On the profitability front, the net margin since FY2019 has been lower than the industry median of 23.9%.
• On the liquidity front, the current ratio since FY2019 has been lower than the industry median of 2.00x.
• On the leverage front, the debt/equity ratio since FY2020 has been higher than the industry median of 0.12x.
• In the last year, the stock generated a decent return of about 39.73%. Hence, it is an opportunity for investors to book a decent profit.
• The stock is trading near its 52-week high price. Hence, there is doubt about its upside potential from the current level and correction in the near term can’t be ruled out.

Key Risks

• The value of investments could decline due to adverse economic developments. It could provide significant challenges to BRW.
• The financial sector has a large exposure to regulatory compliance and laws, potentially increasing costs for the Company.
• Fraud and money theft could affect the reputation and margins of the business.

Recent News

Change in Director: On 17 June 2021, BRW announced that Joanna Hall had been appointed as a Non-Executive Director, effective 16 June 2021.

Financial Highlights (for six months ended 31 March 2021 (H1 FY2021) as of 13 May 2021)

(Source: LSE Website)

• Driven by solid market performance and higher commissions, total income in H1 FY2021 was up 13.7% YoY.
• Due to this strong income growth and cost savings of £4.1 million, adjusted PBT margin rose to 23.5% in H1 FY2021 from 20.8% in H1 FY2020.
• It also led to a strong cash balance of £145.8 million in H1 FY2021, increasing from £144.1 million in H1 FY2020.
• Due to improvement in liquidity, the management increased the interim dividend per share by 5% YoY.
  

One Year Share Price Chart

(Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

Operating costs are expected to rise in H2 FY2021. Also, commission income is expected to fall.  Hence, it would be prudent to liquidate the position at a profit as the stock is also trading near its 52-week high, indicating overstretched valuation. Overall, we do not have significant catalysts to support an uptick in the stock price and recommend exiting the position currently. The stock made a 52-week low and high of GBX 223.50 and GBX 371.50, respectively.

Considering the continued economic and market uncertainty, poorer profitability, liquidity and leverage position of the Company than the industry, and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on Brewin Dolphin Holdings Plc at the current market price of GBX 367.00 (as of 7 July 2021 at 08:24 AM GMT), while we will revisit our stance based on how the future profitability turns out for the Company. 

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peers/ Industry information have been taken from Refinitiv.

*Dividend Yield may vary as per the stock price movement.

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

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