The 7 per cent markdown in the J Sainsbury share price yesterday was not kind. Apart from a blow-out in the cost of creating a new IT platform in Sainsbury’s Bank, there were few nasty surprises in the half-year figures. Sales and profits were down, but no more than expected, and the dividend cut had been well signalled.
Moreover, there were a couple of encouraging signs that Mike Coupe, the successor to Justin King, is steering the supermarket group quite effectively through the storm created by the rise of the discounters. One was cost-cutting, which is £25 million a year ahead of plan.
Another was the evidence that the push deeper into small convenience stores is paying off, with their sales up 11 per cent on the back of a 5 per cent increase in shop numbers. The greater emphasis on non-food, including its Tu clothing range, is also providing some good cheer.
On the macro front, Sainsbury is also hoping for some better news. It argues that after nasty economic downturns, consumers usually first top up their discretionary spending, such as like eating out and holidays. Only a couple of years into the upturn is the benefit usually felt in the supermarket aisles.
Mr Coupe’s real hope for sustained recovery is that Sainsbury’s attention to quality and detail will over the years give it a small but potent competitive edge over rivals. That approach is reflected in improvements it says that it is making to 3,000 own-brand products — from tweaking the taste of fruit juice to putting fashionable quinoa in bread. It has 70 workstreams aimed at trimming expenses in all areas of the business, from cash-handling to energy consumption.
There is no shortage of gloom, however. Sainsbury is still losing market share. Margins continue to narrow. That IT project at the bank could get a great deal more expensive if other attempts to transfer customer bank details to a new platform are any guide at all. Take a look at the exasperatingly expensive separations of TSB from Lloyds and Williams & Glyn from Royal Bank of Scotland and the worry is that this could be an unhappy saga with further to run.
Much of the pessimism is fully discounted in the share price. With the shares dropping to 253¼p, Sainsbury trades on only 11 times expected full-year profits and yields a prospective 4 per cent. It is valued at less than one fifth of annual sales. It’s starting to look oversold.
Market share in groceries 16.5%
4% Pay rise this year for 137,000 employees
MY ADVICE Cautious buy
WHY The shares are looking cheap for the sector
Long the sick man of the aviation scene in the British Isles, Flybe has finally broken back into the black. In a summer in which Ryanair, easyJet and IAG, the British Airways group, have all been posting record profits — between them counted in the billions — Flybe has unveiled a £23 million profit for the six months to the end of September.
This is a line in the sand for Saad Hammad, Flybe’s chief executive. Flybe — a twelfth the size of Ryanair, one ninth that of easyJet — is a different animal from the other brands of the UK airline scene. It is a regional airline, typically flying 90-seater turboprop aircraft off bits of tarmac in the provinces.
It flies point-to-point around western Europe but an important moneyspinner is feeding long-haul operators. It is blockaded out of Heathrow but ferries international business commuters from the West Country, the Midlands, the north and Scotland into the rival global hubs of Amsterdam and Paris.
After spending two years slashing costs, Mr Hammad wants to expand. The dangers at this stage of the cycle are undeniable. The fuel price will not stay benign forever. Launching new services means cutting fares to promote usage, which means diluting margins. Every other airline is forecasting a price war in any case.
Shares in Flybe have had a good run before the positive half-yearlies and the stock still trades on single-digit multiples. But for a reason. Few can work out how a regional airline can ever crack the vicious turns of the cycle. Previously burned investors will know this is a business model to avoid.
Sales £340m, up 10%
MY ADVICE Avoid
WHY Vulnerability to impending price war
Whisper it quietly, but motor insurance premiums are at last picking up. Esure, in its third-quarter trading statement, says that its price increases are above the industry average of 4.8 per cent quarter on quarter and 8 per cent year on year. For the first time in many quarters, its motor insurance income is rising as fast as its claims payouts.
JP Morgan, the house broker, sees this as an important inflection point. Certainly it has been a bit unloved by investors almost since it floated in 2013 at 290p. Right now, though, it is not only raising rates, but winning additional customers. In-force motor policies grew by 28,000 to 1.42 million over the past 12 months.
Esure’s strategy is not without risks. It is insuring youngsters and those with impaired claims records that it wouldn’t have touched 18 months ago. However, Stuart Vann, the chief executive, says his “test and learn” tactics are thus far paying off.
The jury is out on Go Compare, the price comparison website bought wholly in-house this year. Revenues are up after the restoration of Gio Compario in its TV advertising, but additional investment in the business will mean a fall in the profit contribution this year.
The shares fell 4 per cent to 246p yesterday.
Prospective yield 5.7%
MY ADVICE Buy
WHY Motor premiums are at last growing as fast as claims
And finally...
Ophir Energy has shortlisted a group of potential buyers for liquefied natural gas from its Fortuna FLNG project 100km off the coast of Equatorial Guinea. The loss-making oil and gas explorer said that it hoped to sign heads of agreement in November before selecting one or two with whom to strike full sales agreements early next year. It also announced that an independent evaluator had upped its estimate of the gross contingent resource of part of the Fortuna field. Those developments pushed its shares up 8 per cent to 102p.
