The market was inclined to take a favourable view of J Sainsbury’s first-quarter trading update, but to a sceptic this looks suspiciously like clutching at straws.
There are positives, not least a return to a small degree of volume growth for the first time in five years, but I remain doubtful that Sainsbury’s and the two other quoted supermarkets have reached the bottom of the downgrade cycle.
Let’s look at those positives. The rate of price deflation on the goods Sainsbury’s sold, excluding fuel as ever, was 2 to 2.5 per cent. The decline in like-for-like sales was lower, at 2.1 per cent, in the quarter. This means that volumes grew by 1 to 1.5 per cent, not much but a nudge in the right direction.
If, as Sainsbury’s expects, inflation returns in a measured way some time next year, that volume growth will look more impressive. For the past five years or so, the sum that each customer has spent on each visit, the amount in each basket, has been falling. People are cannier, they shop more often and they throw less away. That decline has flattened out.
Sainsbury’s has reduced the amount of discounting it has to do, perhaps 30 per cent of goods on sale against a high of 40 per cent and below the industry average. It has still narrowed the gap between its prices and those on offer in the discounters Aldi or Lidl to perhaps 10 per cent. It is no longer losing market share, if it is not gaining much either.
The supermarket has instituted a £500 million cost-savings programme and halted the mad programme to open new stores, which has made little sense since 2010.
Now the negatives. The dividend will be cut to perhaps 10p this year, offering a yield, at the shares’ diminished price today, of about 4 per cent.
Of the quoted three, Wm Morrison appears to be increasing sales and has just instituted some price cuts. Tesco is axing the dividend and will reinvest the money saved on its own reductions.
It is implausible that the discounters will stand by and allow that earlier growth to stall; more likely, they will take action on prices themselves. Sainsbury’s shares, up 11¼p at 260¼p, sell on 12 times this year’s earnings. This suggests no compelling reason to buy.
Estimated price deflation 2-2.5%
My advice Avoid
Why Though the shares are yielding 4% on the expected cut dividend, which provides some support, the sector has not hit the bottom yet
Over the past couple of days the oil price has recovered on signs that US stocks are falling and production levelling off, Brent crude now seemingly comfortably above $65 a barrel.
Time, perhaps, to consider a little M&A in the sector, if buyers can be persuaded that the next direction is up. Soco International is talking about evaluating its African assets, in places such as the Republic of Congo and Angola, “with a view towards further rationalisation”. No promises, then, but the option of bringing in partners to fund development.
Soco is an odd beast among the oil explorers. The majority of its output comes from its Te Giac Trang field off Vietnam and half its free cashflow goes to fund dividends, but this depends on what capital spending is needed to develop other wells.
This hybrid model makes those payments erratic but provides some support for the shares, off ½p at 180¼p. Investors got 40p in 2013, 22p last year and 10p so far for 2015, though further payments may be limited by high capital spending commitments this year to increase production from that Vietnam field.
If you seek a long-term punt on oil, Soco looks like a good one, then.
Production this year 11,900 bpd
My advice Buy long term
Why Dividend, if erratic, provides some support
The market has enough reasons to have fallen out of love with online retailers that made their debut early last year, after the recent woes of AO World. Investors will not be celebrating their purchase of shares in the fashion business boohoo.com either.
There are some similarities. Both saw their shares soar in early dealing. Both shares are now languishing at little more than half their float prices. Boohoo issued a profit warning in January, after the warm autumn that hit several other clothes retailers.
The company had much to prove in its first-quarter trading statement to the end of May, and to be fair the trends are entirely positive.
Sales were up by 35 per cent, though there was some drag from the lower euro, Europe sales up 45 per cent at constant currency rates but 27 per cent on a reported basis. The weak euro also meant prices trimmed to remain competitive.
The number of active customers was up by 32 per cent to 3.3 million, and the indications were they were spending more per head. Boohoo is narrowing its marketing spend outside the UK to concentrate on its chosen markets, Ireland, the US and Australia, which should improve overseas performance. It ended the quarter with £58 million in the bank.
While there are capital spending requirements, such as a possible automation of its Burnley distribution centre, the company is applying to buy back as much as 10 per cent of the shares. Up 3p at 29p, they sell on a fairly meaningless 24 times earnings. Given the importance of summer trading, this looks too early to buy.
Sales £41.3m Margin 60.6%
My advice Avoid
Why Too soon since profit warning to consider a buy
And finally . . .
A miserable trading statement from Dialight, and almost a third off the share price. This is a leader in LED lighting, mainly supplying oilrigs, telecoms masts and the like. The company has issued profit warnings in the past. In April it said that revenue growth was exceeding expectations but that there were operational problems. Now there has been a slackening in orders from the US and Europe, linked to the oil and gas slowdown. Canaccord, the house broker, has cut its profit forecast by 27 per cent. One day this one will come right.
