J Sainsbury Plc

J Sainsbury Plc (LON: SBRY) is an FTSE 100 listed Company, which operates and manages a chain of supermarkets in the United Kingdom.

Investment Highlights - J Sainsbury Plc – Buy at GBX 198.25

• Although the Company has shown a decline in revenue for H1 FY2021, while revenue from digital business increased significantly by 117%.
• In the last 3 months, the Company delivered a decent return of ~ 6.15% and delivered a higher return compared to the benchmark Index (FTSE-100 Index).
• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Cash Flow and Price/Earnings multiples of the J Sainsbury Plc are currently lower as compared to the corresponding multiple of the Food & Drug Retailing industry. It reflects, shares are undervalued as compared to the industry.
• From the technical standpoint, 14-day RSI is currently supporting an upside move (around 44 level), which means the stock price could increase in the short term.

Key Risks

• The Company is facing an extremely volatile trading environment, which is leading to an increased cost to operate the business.
• The outlook for sales is uncertain due to the rapidly evolving nature of Covid-19 disruption.

Financial Highlights – H1 FY2021 (19 September 2020) (released on 5 November 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2021, the total sales declined by 1.1%, while sales from retail and digital businesses have improved.
• The Company has a Free cash flow of £943 million for the period and reduced net debt to £267 million.
• The Company announced a special dividend of 7.3 pence and an interim dividend of 3.2 pence.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company has shown a decline in financial performance in H1 FY2021, while sales remained stronger than base-case assumptions. The general merchandise and Grocery sales in H2 FY2021 remained strong in H2 FY2021. At present, the Company is not able to predict the impact of covid-19 but has continued to make the investment to increase innovation and improve food quality with lower prices. The Company expects full-year underlying profit before tax to increase by 5%. SBRY is looking to increase capital expenditure in the coming three years to fund transformation plans for Argos and logistics. The Company expects strong cash generation along with working capital improvements. J Sainsbury will meet the target of net debt reduction by around £750 million till March 2022. The stock made a 52-week low and high of GBX 171.19 and GBX 236.70, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on J Sainsbury Plc at the current price of GBX 198.25 (as on 6 November 2020, before the market close at 8:00 AM GMT), with lower double-digit upside potential based on 11.96x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

WM Morrison Supermarkets Plc

WM Morrison Supermarkets Plc (LON: MRW) is a United Kingdom-based Company, which deals in the retail supermarket stores and associated activities.

The Company will release Christmas trading statement on 5 January 2021.

Investment Highlights - WM Morrison Supermarkets Plc – Buy at GBX 163.00

• The Company entered H2 FY2021 with strong momentum and expected to deliver strong performance in FY2021.
• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Cash Flow, Price/Book Value and Price/Earnings multiples of the WM Morrison Supermarkets Plc are currently lower as compared to the corresponding multiple of the Food & Drug Retailing industry. It reflects, shares are undervalued as compared to the industry.
• Over the course of 4 years (FY16 – FY20), the Company’s net profit surged from GBP 222 million in FY2016 to GBP 348 million in FY2020. Compounded annual growth rate (CAGR) stood at ~ 11.89%.
• From the technical standpoint, 14-day RSI is currently supporting an upside move (around 38 level), which means the stock price could increase in the short term.

Key Risks

• Covid-19 pandemic also poses a risk to the supply chain and operating cost and could even interrupt the business with low demand.
• Change in regulation pertinent to Food Safety and Product Integrity can lead to additional costs.

Financial Highlights – H1 FY2021 (2 August 2020) (released on 10 September 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2021, total revenue was down by 1.1%, due to lower fuel demand.
• The Company witnessed a strong balance sheet, with low debt and total RCF (Revolving Credit Facilities) of £1.75 billion.
• The interim dividend improved to 5.7% to 2.04 pence through the decision on special dividend remained deferred.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company has shown a decline in financial performance in the first half of the financial year 2021. Both the top-line and the bottom-line performance declined, with lower profitability margins. The sales in H2 FY2021 are improving with lockdown easing, while online sales continued to grow. MRW has strong liquidity and cash flow to manage the ongoing uncertainties. The interim dividend per share of 2.04 pence reflected strong first-half trading performance and confident outlook. Morrison is confident of continued strong momentum into the second half, improved net debt and free cash flow, and another year of profit growth. The stock made a 52-week low and high of GBX 157.55 and GBX 210.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” recommendation on WM Morrison Supermarkets at the current price of GBX 163.00 (as on 6 November 2020, before the market close at 10:10 AM GMT), with lower double-digit upside potential based on 13.36x Price/NTM Earnings(approx.) on FY21E earnings per share (approx.).

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

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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