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Should investors pin their hopes on Sainsbury’s overhaul plan?

Sainsbury’s, tipped as one of private equity’s top targets, is focused on its own restructuring
Should investors pin their hopes on Sainsbury’s overhaul plan?
  • After Asda and Morrisons, Sainsbury’s could be next in line for a buyout
  • But investors should wait to see if its new leadership can deliver on plans to win back shoppers from Aldi

Private equity is hungry for new deals and UK grocers currently look like some of the tastiest on the menu.

With Asda snapped up and a coterie of suitors now circling Wm Morrison (MRW), attention is naturally turning to larger rival Sainsbury’s (SBRY), which has similarly been suffering years of underperformance. A share price festering near multi-decade lows combined with its vast footprint and historic brand must be tempting many buyout firms.

But following a trading update on 6 July, chief executive Simon Roberts was quick to shoot down speculation. “If we had anything to update on, we’d be updating on it,” he curtly told reporters. 

Instead, the company wanted to direct attention towards its internal restructuring effort, laid out by the newly instated Roberts in November. It said the plan to put food back at the heart of Sainsbury’s had since helped it pick up market share: sales excluding fuel grew 1.6 per cent year on year in the quarter ending in June, exceeding expectations. The supermarket lifted its guidance for full-year underlying profit before tax from £620m to £660m.

Now Sainsbury's is funnelling some of its surplus cash into a £50m price war with Aldi, the German budget supermarket that helped send its shares tumbling when it first stormed onto the UK market about a decade ago. The British grocer’s aggressive strategy explicitly aims to match Aldi on price, while delivering “Sainsbury’s quality”. If it can also find a buyer for its struggling bank, it could be a winning recipe.

 

 

Sainsbury’s shares have picked up since November and current investors should be keen to see if the new leadership can continue to deliver on the restructuring effort, rather than cash out at a deflated price in a private equity buyout.

Others may be inspired to reconsider the business, which has long been dismissed as one of the rotten vegetables in the UK stock basket. Analysis by Investors’ Chronicle shows short-sellers have taken more positions against Sainsbury’s than any other UK stock over the past decade, although the takeover speculation has prompted some to pull back. Low margins and vulnerability to competitors mean supermarkets will never lead the UK market. But at such a low valuation we think Sainsbury’s deserves a hopeful upgrade to hold. 

Last IC view: Sell, 239p, 28 Apr 2021