‘Good time’ for QIA to up Sainsbury’s stake

By Denise Marray

Gulf Times Correspondent London

If “the QIA is still committed to owning Sainsbury’s then it wouldn’t be ridiculous for them to be saying to their team: ‘Should we increase our position or should we take Sainsbury’s over and run it as a private business?’”

This was the view expressed this week by Clive Black, head of research and stock broking analyst in food retailing at Shore Capital.

Qatar Holding, a wholly owned subsidiary of the Qatar Investment Authority (QIA), is a major shareholder in Sainsbury’s with a 26% stake.

Black said of the QIA: “To their credit the QIA has been a very patient investor; they are a long-term investor, and in that respect they have allowed Sainsbury’s management to focus on running the business.”

Now he said it might be time for some strategic moves. “Sainsbury’s stock is now trading below its net asset value (NAV) and that’s the sort of level that we would expect private equity corporate activity to start being looked at. We can’t say for certain that anyone is going to bid for Sainsbury’s – that would be stretching things too far – but if the Qataris wanted to think strategically about Sainsbury’s, now would be a good time to do it.”

He was taking a long-term perspective in a week when Sainsbury’s saw a drop in performance over the last quarter. His reasons for seeing a long-term positive picture, he explained, are based on several key factors. “Sainsbury’s shares more or less equal second position with Tesco in the UK supermarket industry. It has a strong online capability and a very wealthy freehold asset base largely positioned in the South East of England which is the prime economic generator and wealth creation region in the UK,” Black pointed out.

He recognised that in the short term there are choppy waters ahead. “We have to reduce our profit expectations for the next couple of years. The industry seems to be entering a period where the pricing environment in the UK is undergoing quite a significant deterioration. The retailers are having to cut prices and we could be looking at significant gross margin investment and, therefore, further downgrades.”

He added: “We have downgraded our expectation for 2014-15 by 5%. However, we have bigger concerns about that because while Sainsbury’s was reporting its trading we had an announcement from Morrisons, which is the number four retailer in the UK, that they would invest £1bn in pricing over the next three years. And they effectively rebased their profits from nearly £700mn up to February 2015 to £350mn. That is a concern alongside investment by Tesco of £200mn in pricing (which we don’t consider to be anywhere near enough) in addition to the fact that we are starting to see some discounting taking place.”

Black pointed out that milk prices have gone down from £1.39 for four pints of milk (2.27 litre) to just £1 per four pints. “Milk is one of the top five lines in the UK supermarket industry and that price cut alone would probably cost Sainsbury’s somewhere around forty to £50mn if it were to be sustained over a whole year,” he said.

He said that when considering the four key elements of price, quality, range and service, there is a tendency at the moment in the UK for customers to prioritise price.

“Sainsbury’s is not a price setter – it is a price follower and if Asda, Morrisons, Aldi and Tesco decide to knock seven bells out of each other on price, then Sainbury’s will be a victim of that,” Black said.

He noted: “Sainsbury’s is a mass market retailer with an orientation to the mid-to-higher end of the market.”

It sits in the middle of the quality market below Marks & Spencer and Waitrose but “considerably above Asda and Morrisons in terms of food quality, range and specifications,” he observed.

“It would be very dangerous and damaging for Sainsbury’s to try and go too far up the value curve; I’m not sure that they would attract customers from Waitrose and they could end up encouraging customers to go elsewhere,” Black said.

He commented on some interesting trends in the UK market. He pointed out that the UK had the fastest growing population in Western Europe which should be a positive for supermarkets. But changes in habits had had an impact on profits. People are much more conscious about food waste. “The amount of food that people throw away has reduced quite markedly – they are being much more careful in the way they handle their food and that trend has had a depressing effect on trade to some degree,” he said.

With pub food prices being very competitive he also noted that a lot more people are eating out which also has a depressing effect on supermarket volumes. Also, he said, the activities of discounters such as Aldi and Lidl are taking share away from the top six stores.