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Sainsbury’s expects £500m blow to profits

The supermarket does not believe it needs to inject capital into its financial services arm
April 30, 2020

J Sainsbury (JDW) forecasts a coronavirus impact of £500m to underlying pre-tax profits, which the supermarket group expects will be largely offset by grocery sales and around £450m in business rates relief from the government. This time around, underlying pre-tax profits fell 2 per cent to £586m. Management has elected to defer making a decision on awarding a final dividend in light of the uncertainty that lies ahead.

IC TIP: Sell at 201p

The expected hit to profits is predicated on the additional costs incurred in protecting staff and customers from potential infection, along with an expected fall in fuel, clothing and general merchandising sales. Over the full year, grocery and clothing sales grew 0.4 per cent and 1.2 per cent, respectively, with a 2.9 per cent contraction in general merchandise dragging overall retail sales down 0.4 per cent. This excludes the impact of fuel sales, which were flat over the financial year. Unfortunately, the daily number of car journeys in the UK has fallen significantly in the intervening period. 

Underlying profits for the financial services division rose 55 per cent to £48m, although management now expects that this will be followed by a loss in FY2021, due to rising bad debt provisions, pandemic protection costs, and a collapse in commission income from ATMs (linked to travel money).

Before the release of these figures, analysts at Berenberg had predicted that £375m would need to be injected into the group's bank over the next three years, arguing that it is overly exposed through its unsecured consumer lending. Berenberg was also working on the assumption that the bank would sell its £1.9bn mortgage loan book. However, Sainsbury said that it was confident there would be no need for remedial measures, observing that it had sufficient capital for around £300m in loss absorption and excess liquidity of around £200m. The bank has also stopped underwriting new mortgages. Financial services may only account for 8 per cent of underlying pre-tax profits, but a significant reversal here could thwart the ability to meet net debt reduction targets. Any failure to do so could conceivably lead to a de-rating in the shares. 

Prior to these results, Berenberg forecast March 2021 EPS of 11.2p, falling to 11.1p in FY2022.

J SAINSBURY (JDW)   
ORD PRICE:201pMARKET VALUE:£4.46bn
TOUCH:201-201.3p12-MONTH HIGH:237pLOW: 171p
DIVIDEND YIELD:1.6%PE RATIO:35
NET ASSET VALUE:328pNET DEBT:89%*
Year to 7 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201623.554823.912.1
201726.250317.510.2
201828.540913.310.2
2019**29.02027.611.0
202029.02555.83.3 †
% change-0.03+26-24-70
Ex-div:na   
Payment:na   
*Includes lease liabilities of £5.77bn. **Year restated. † Decision on final dividend delayed