Sainsbury Plc

Sainsbury Plc

 

 

 

 

 

 

Sainsbury

Introduction

Sainsbury Plc is the chain of supermarket that is second largest in The United Kingdom. The company holds 16% market share in the sector of supermarket. The company was founded in the year 1869 and has its headquarters in London. The company is listed at FTSE 100 index and London stock exchange. The supply chain of the company operates from around 13 distribution centers that are regional and also have 2 national distribution centers for goods that are slow moving and two food facilities for frozen goods.  The product range of the company includes hypermarket, supermarket, convenience shop and forecourt shop. The revenue generated by the company in the year 2019 stood at 29.007 billion pounds. The operating income of the company is at 312 billion pounds and the net income stands at 219 billion pounds (Sainsbury Annual report, 2019). There are around 116,400 employees that work with the company. The various subsidiaries of the companies include Sainsbury bank, Sainsbury Local Argos, Habitat and nectar. This report is aimed at studying the share price movement, beta movement, gearing ratios and the rating of the company in respect of rating agencies.

Share price movement

(Source: Bloomberg)

From the time period of September to March the company’s share prices have varied from $198 to $235. During the September month of 2019, the shares of the company were growing and showed an increase of around 11.7%. The reason for this change was the plans of Chief Executive Mike Coupe. The plans shared included the cost cutting in the group by around 500 million pound in the next 5 years (Roland Head, 2019). Also the company has plans to revamp the store estates. With that 10 new stores was planned to be opened and 10-15 closures were in lined. These were certain reason of changes that brought in positive growth in the share prices of Sainsbury. From the share value of 196 p the prices have reached to 205 p.

 The highest it reached was during December 2019. The pretax profits of the company rose to 239 million pounds and there was a growth of share prices by 13%. This effect came into show after the announcement that business rates holiday will be saving more than the double of annual profits to the supermarkets (Telegarph, 2020).

In the month of January 2020, the share prices shows a downward trend. The prices of the share reached to 200 in January from being at 235 in December. This happened because of the pandemic COVID-19 that is affecting the functioning and the business in the whole world. The stores have been shut for the longest time and there is drop in the sales for the end quarter. This has impacted the revenue section of the company and in turn led to reduction in the share value of Sainsbury. The market has been impacted overall by the pandemic and that has affected the company too. Thus, these were the major share price movements that happened with the Sainsbury for different reasons at different point of time.

Beta of the company

The beta of the company measures the volatility of the company. It measures how the company’s equity market value changes with respect to the overall market. Beta measures the systematic risk of the company in respect of the whole market (Kamara et al, 2018). It describes the changes in the returns of security concerning the swings in the market. The beta of Sainsbury has been calculated with respect to the ordinary market share price of that time considering the market price as Y variable which is independent and X as dependent and security prices of the company. The following results were obtained through regression and coefficient of beta was at:

Beta coefficient of Sainsbury and Ordinary market share (Appendix 1)prices

           
                 

Regression Statistics

             

Multiple R

0.153412893

             

R Square

0.023535516

             

Adjusted R Square

-0.015523063

             

Standard Error

203.08413

             

Observations

27

             
                 

ANOVA

               

 

df

SS

MS

F

Significance F

     

Regression

1

24851.88025

24851.8803

0.602569685

0.444881648

     

Residual

25

1031079.096

41243.1639

         

Total

26

1055930.977

 

 

 

     
                 

 

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

6260.80921

805.2419117

7.77506625

3.93637E-08

4602.382449

7919.235971

4602.382449

7919.235971

X Variable 1

2.944666409

3.793433392

0.77625362

0.444881648

-4.868055909

10.75738873

-4.868055909

10.75738873

 

 

The coefficient stands at 2.94 of the company in respect to the market that prevails. Also, as per the ICAEW the beta of Sainsbury at present according to financial time beta stands at .4773 (Financial times, 2020). The differences are depicted because of the time period difference. Beta calculated for the company through regression coefficient was from September to March while the beta depicted by the financial times includes the time period till date.

The beta as per the commercial rating id defensive. The value is lower than 1. It is the best strategy foe the company in present times. According to a report by Financial express when the market is volatile or in a downturn movement, defensive strategy is one of the best strategy that is obvious and is supposed to be opted by the company.  The company’s beta as per the commercial ratings is less than 1 that means the effect on beta will be less than the changes in the market. If there is change of 10% in the market price than the change in company’s stock prices will only be 4.7%. This shows that company is more stable in riskier times. Also, the beta having a value lower than 1 will provide lesser return when the market is growing. But at this point when there is a fall in market defensive beta is the best method to opt for (Choi, 2017). While the overall beta from September to March is aggressive. The beat stands at 2.94 for that time period. This brings more returns for the shareholder’s once the market grows. If the market has grown by 10% then the positive change in the stocks of the company will be at 29.4%. This strategy will be best when the market is growing but in the downturn time defensive strategy is best as it will reduce the losses for the stakeholders which is being followed by the company.

Company’s rating

 

The company’s rating has fallen over the period and after BBB- the rating agencies have withdrawn their ratings from the year 2015. Over the years the ratings of Sainsbury have been degraded by the S&P due to the unsecured bonds that were being issued by the company. The company required finance and for the purpose it issued bonds that were not backed up by assets. These were risky due to which the ratings of the company were degraded by the credit rating agencies for different years. The debt in the company increased due to which the capital structure of the company lost its value. Credit rating agencies provide ratings to the company on the basis of the capital structure they hold and the security for the debt they can provide. For Sainsbury it reduced as company has planned its growth over the years for which it needed funds and had opted for the unsecured sources. These were the reason due to which the rating of company from AAA bottomed down to BBB- and at last withdrawn in the year as there was more of a risk or debt in the company’s capital structure.

In the year 2006 the company improved its position slightly. In that year according to Financial times, the group purchased back its unsecured bonds that were floating in the market. For the purpose the company issue secured bonds and brought back its unsecured bonds. This helped company in various ways, the annual interest payments of the company dipped and also there was a hole in the pension fund of Sainsbury which was reduced to half (Financial times, 2006). In this manner the company improved its structure and the ratings stayed at appoint for some time. But later they again started to fall and in the year 2015 S&P and Moody withdraw the rating from the company.

 

 

 

Company Financing

 

 
 


 

The company has a debt of 7506 million pond while the equity of the company stands at 7960 million pound. The gearing ratio for the company stands at .94. This depicts that company has more of equity than debt in the year 2019 (Annual report, 2019).  Gearing ratio helps in analyzing the leverage of the company. The equity holders of the company will be able to cover the debt. 94% of the shareholder’s equity will cover all the debts that the company owns. This is a good position as it is required that company should always have that much of debt which can be covered by its equity holders. This also provides an edge to the company for taking more loans in the future as company is able to manage its debt/ equity ratio and is in a condition of covering all its liabilities.

.

In the year 2018 the debt of the company was at 6724 million pound and equity at around 6925 million pound. The gearing ratio (Appendix 2) of the company stood at .97 that depicts that 97% of the equity amount will cover all the debt portion of the company.

Comparison

The financial leverage of the company has improved from the year 2018 to 2019 as the debt burden on the company has been reduced while the equity is able to cover more in the year 2019. This shift from 97% to 94% shows that company has paid certain portion of its debt and is also improving its capital structure by reducing the amount of interest it has to pay. This will help the company in attaining a better position as it will reduce the financial cost of the company and with that profits will increase. Reducing burden of debt will also strengthen the financial leverage or position of the company. The company in future if required will be eligible for more loans and it will be easier for them to collect the finances. Thus, the company shows improvement with regards to its performance from 2018 to 2019 financially. This will also help the company in paying off the creditors in case of any urgency or if the company wants to liquidate. This will give a benefit as the debt can be covered by the shareholders of Sainsbury. Hence by reducing its debt the company is creating a better prospect for themselves.

 

Dividend Policy

Sainsbury pays of the profits to the shareholders in the form of dividends. The amount and the frequency that is to be followed is decided by the board of directors. Usually the company pays off its dividend half yearly. Interim dividends of the company are paid in January while the final dividends are paid in the July. The company pays off dividend in various forms. The dividends are directly transferred to the bank accounts of the shareholder. Also, for dividends to be reinvested the company has a plan of Dividend Reinvestment Plan where they allow their shareholders to reinvest their dividends which are paid in cash back to the shares of the company. The dividend yield of the company is at 1.8% (Annual report, 2019). According to dividenddata.co.uk the long term dividend yield of the company is negative. Thus the company follows a dividend policy where the dividends are paid out twice in a year.

Interim dividends and the final dividend policy shows that company is generated undistributed profits. This depicts a good position of the company and shows that company has enough undistributed profits that can be shared with the shareholders. Also, the shareholders are benefitted and the value of the company improves. Thus, interim dividend policy will help the company in growing.

Overall Financial performance of the company

The company has improved in the year 2019. There is a growth of 2.2% in taste the different volumes of company. Also, in general merchandise and clothing section the visits passed 2 billion pounds for the very first time. The company sale for the year has grown by 2.1% and EBIT raised by 7.8% for the company. The proposed full year dividend of the company is up by 7.8% which is a good number for paying off the dividends to the shareholders. The EPS of the company has also grown in the year 2019 by 7.8%. The profits before tax has fallen by 31.6% while 8.5% is the return that is provided by the company to its capital employed. Also, there is a reduction of carbon emission by 35%. The free cash flow of the company stands at 461 million pounds. Also, the gearing ratio of the company has improved for the year (Annual Report, 2019). This shows that company is improving financially. The figures depict that the company is performing well and has improved its financial stability and the results from the previous year.

Shareholder’s value

The company is trying to provide value to its shareholders by paying them dividends and also creating products of quality. Also, with its same day delivery activities there were around 57% stakeholders of the company who got benefitted by it. The company is also valuing the quality products at fair prices to the stakeholders of the company. To improve its customer base so as to improve the value of shares the company has shown a growth of 13% in the fast track delivery of products. The company is also creating the value by doing activities sustainably. The product are source in a manner that the opportunities are identified along the way and there is economic growth in the finances of the company. Over the course of five years the major Key performance area that creates value for shareholders like underlying profit before tax has improved (Annual report, 2019). The earning per share of the shareholders have improved and the free cash flow of the company has improved.  This depicts that company is taking various steps to create the value for its shareholders and generated them better results.

Conclusion

Sainsbury is a second largest chain of supermarket in the United Kingdom and also a contributor in FTSE100 index. The share price of the company shows a positive movement yet at present due to pandemic the share prices of the company have fallen. In between due to business tax reduction the share prices of the company improves and also when the company planned an improvement project the value of the shares improved significantly. The beta of the company as per commercial calculation is defensive while overall the beta shows an aggressive approach of the company. The ratings of the company have been degraded over the years due to unsecured bonds that were floated in the market and also after 2015 the company’s rating has been withdrawn by S&P. The company have a policy of paying dividends twice in the year. The debt-equity ratio of the company has improved from the previous year and the financial performance shows a good position of the company. Thus, making it beneficial for the growth of the company and creating value for the shareholders of the group.

 

 

References

Annual Report. 2019. Sainsbury PLC. Retrieved from: https://www.about.sainsburys.co.uk/~/media/Files/S/Sainsburys/documents/reports-and-presentations/Sainsburys_AR2019.pdf

Choi, S. C. (2017). Defensive strategy against a private label: Building brand premium for retailer cooperation. Journal of Retailing and Consumer Services34, 335-339.

Financial times. 2006. Sainsbury’s refinancing likely to set a trend. Available at: https://www.ft.com/content/b78511a6-a7c3-11da-85bc-0000779e2340

Financial times. 2020. Equities. Retrieved from: https://markets.ft.com/data/equities/tearsheet/summary?s=SBRY:LSE

Kamara, A., Korajczyk, R., Lou, X., & Sadka, R. (2018). Short-Horizon Beta or Long-Horizon Alpha?. The Journal of Portfolio Management45(1), 96-105.

Roland Head. 2019. Why the Sainsbury’s share price rose 11.7% in September. Retrieved from: https://www.fool.co.uk/investing/2019/10/09/why-the-sainsburys-share-price-rose-11-7-in-september/

Telegraph. 2020. Sainsbury PLC. Retrieved from: https://www.telegraph.co.uk/markets-hub/share/S932/SBRY/Sainsbury(J)

 

 

 

 

 

 

             

 

 

 

Appendix 1

Share values of the company and ordinary share prices

Date

Adj Close of Sainsbury

Adj Close of AORD

9/2/2019

198.370499

6752.700195

9/9/2019

217.853302

6777.100098

9/16/2019

212.441406

6839

9/23/2019

218.935684

6824.100098

9/30/2019

206.734329

6636.899902

10/7/2019

211.162247

6721.899902

10/14/2019

212.736603

6758.399902

10/21/2019

208.899078

6841

10/28/2019

201.322433

6779.100098

11/4/2019

197.780106

6833.200195

11/11/2019

201.519226

6898.899902

11/18/2019

214.399994

6816.5

11/25/2019

214.300003

6948

12/2/2019

220

6813.5

12/9/2019

223.199997

6844.600098

12/16/2019

232.699997

6924.399902

12/23/2019

235.800003

6936.299805

12/30/2019

229.199997

6855.200195

1/6/2020

220

7041.899902

1/13/2020

216.399994

7180.299805

1/20/2020

209.699997

7203.200195

1/27/2020

202.399994

7121.200195

2/3/2020

202

7121.399902

2/10/2020

206

7227.100098

2/17/2020

210.699997

7230.399902

2/24/2020

195.75

6511.5

3/2/2020

204.300003

6461.100098

 

Appendix 2

 

Gearing ratio

 

 

Year

Particulars

Amount

Gearing ratio

2019

Debt

7506

0.942964824

 

Equity

7960

 

2018

Debt

6724

0.972378886

 

Equity

6915

 

 

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