Andrew Miller column
Jun 27 2007 By Andrew Miller, The Journal
Analysts covering the UK supermarkets sector can be forgiven for looking tired at the moment.
Takeover speculation, disappointing results and signs of a long-awaited recovery in the sector suggest they need to be very careful with their investment recommendations.
The newspapers have been full of speculation about Sainsbury's recently because Qatar's ruling family has increased its stake in the group to 25%. The move, which has sent Sainsbury's shares soaring, marks the first time in the retailer's 138-year history that the Sainsbury family is not the largest shareholder.
It is still not clear whether the Qatari ruling family plan to use their stake as a platform to launch a full bid, or whether they just intend to pressure management to release some of the value from Sainsbury's £8bn property portfolio.
We recently upgraded our fair value for Sainsbury shares, reflecting the fact the markets are likely to keep valuing the company as a buyout prospect for the time being.
Our new valuation also reflects a further re-rating of the value of the property portfolio. However, the risks for Sainsbury's of a full property sale and leaseback - and the likely disadvantage this will cause it against its UK competitors - make this a risky deal for any investor to take on.
On the other side of the street, shares in Tesco, the UK's largest supermarket group, haven't been faring as well. Tesco recently announced first quarter results that were a touch light of expectations.
The bulk of the shortfall appears to be coming from a slowdown in non-food items in the UK. UK like-for-like sales, excluding petrol, came in at 4.7%, lower than expectations closer to 5%.
The news sent the shares down sharply, leaving them trading in unfamiliar territory at the bottom of the FTSE 100 losers' board.
Though Tesco has some potentially exciting opportunities now in the International division, particularly the US, we think that there is little to drive the shares upwards in the near term. First, inflation was at 1.8% over the first quarter of the year, which we think was caused by very strong food price rises.
We tend to think that, in the short term at least, this is just volatility and is likely to dissipate over the second half of the year - making like-for-like growth harder for Tesco to achieve over the second and third quarters.
Second, the shares are on 19 times next year's consensus earnings, which we think means they look reasonably valued.
While we still recommend Tesco's as a core holding in the supermarket sector, investors looking for near-term gains should consider Morrison's as well.
If you value Morrison's property at mid-range prices, the Morrison's property portfolio accounts for 292p a share, very close to the shares' current price of just 300p. In addition to this, Morrison's has an impressive new management team, and could return significant cash to shareholders in the medium term.
Andrew Miller is regional centre head of Gerrard, a part of Barclays Wealth.
