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Large Cap UK Supermarkets

UK Large Cap Supermarkets; market share variability reduces

UK supermarkets are experiencing tough trading conditions, deflationary price trends (grocery prices fell 1.7% from June 2014; IGD Retail Analysis) and market share attrition. Opinion is divided on recovery prospects in 2015. The sector has suffered from weak decision making in the boardroom. Examples include Sainsbury’s rejection of the Qatari Delta Two 600p offer in 2007, Tesco’s costs blowout and accounting shenanigans and the £500m “property for price cuts” plan by former Morrison CEO Dalton Morris.

But the market share “wars” of recent years appear to be abating. Recent Kantar Worldpanel data (June 2015) puts the biggest four retailers share at 72.6%. When viewed over the last 5 years, market share losses are not of an irrecoverable magnitude.

Leading Supermarkets Market  Share 2015 Market Share 2010 Variance
 Tesco 28.6% 30.8% -2.2%
Asda 16.5% 16.7% -0.2%
Sainsbury 16.5% 16.2% 0.3%
Morrisons 11.0% 11.9% -0.9%
Co-Op 6.0% 5.9% -0.1%
Aldi 5.3% 3.1% 2.2%
Waitrose 5.1% 4.2% 0.9%
Lidl 3.7% 2.3% 1.4%
Source: Kantar June 2015

W Morrison (MRW) BUY

Post the Q1 update (7th May) which showed like for like sales down 2.9%, the new CEO has re-affirmed his commitment to appropriate store closures, and improving service delivery via an improved online access and more convenience stores. Recent indications on debt (which declined to £2.2bn from £2.3bn end 2014) are more encouraging. Morrison remains behind in online/ deliveries and its convenience store estate. Closing this gap to its peers could take to 2018. We are encouraged that Morrison market share is starting to recoup its losses.

Company W Morrison
Share Price 184
Target Price 215
52 Wk Hi/Low 208/151
Shares O/S 2.335bn
Market Capitalisation £4.3bn
Avg Daily Volume 9.3m
Dividend Yield 2.71%

Source; Fidessa plc

Key Risks to Price Target

i) An intensification in price competition would reduce Morrisons ability to generate cash.

ii) Significant investment is required to achieve a national footprint in food deliveries.

iii) Morrison’s £1bn property disposal plans over 2015-2017 are an EPS risk if sales proceeds are lower than expected

J Sainsbury (SBRY) BUY

Q1 saw no trading recovery, like for like sales fell 2.1% in Q1 above the 1.9% decline in FY15. The board increased its convenience store portfolio by 7 against only 1 new supermarket. More encouraging was the growth of “Click and Collect” online sites that service online growth. Sainsbury’s twin convenience store and online strategy is working but the problem remains

The return of net like for like sales growth is likely still 12-18 months away given price deflation on major lines. EPS forecasts for 2016 at 21.56p (FY2015 26.4p) these are expected to rise 2% to 22.02p in 2017. The 2016 profits should equate to the trough but the problem is estimating the quantum of growth which is likely to remain in the low single digits.

Company J Sainsbury
Share Price 271
Target Price 330
52 Wk Hi/Low 325/225
Shares O/S 1.922bn
Market Capitalisation £5.21bn
Avg Daily Volume 9.4m
Dividend Yield 4.81%

Source; Fidessa plc

Key Risks to Price Target

i) An intensification of price competition and/or increased migration to supermarket discounters.

ii) Rising gearing 42.3% and significant pension deficit of £651m.

iii) A disposal of the Qatari stake would be viewed negatively by investors.

Tesco (TSCO) HOLD

The Q1 update, a 1.3% group like for like sale decline (excluding petrol) beat the consensus sales decline of 2%. Investors welcomed news of UK customer acquisition as evidence of at least a pause in Tesco’s five year market share decline. The new CEO’s plan is taking shape, the next step should be the sale of Homeplus (Tesco’s South Korean business) for a mooted $6-$7bn. The exit should help shore up the balance sheet (which halved to £7bn in FY15) but will mark a major exit from abroad. The South Korean operation (>400 owned stores / 6m customers) is the largest Tesco business abroad.

Company Tesco
 Share Price 214
Target Price 214
52 Wk Hi/Low 290/164
Shares O/S 8.14bn
Market Capitalisation £17.56bn
Avg Daily Volume 24.3m
Dividend Yield 0%

Source; Fidessa plc

Key Risks to Price Target

i) Balance sheet risks remain. There is a high probability of a new equity raise.

ii) Further deterioration in Tesco’s credit rating would impact financial leverage and metrics.

iii) Little detail is yet available on Tesco’s recovery plans and management decision making appears overly concentrated in the new CEO Dave Lewis.

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