Interactive Investor

Supermarket stocks get thumbs up from City traders

3rd December 2020 15:01

Graeme Evans from interactive investor

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A decision by Tesco, Sainsbury’s and Morrisons to repay business rates relief has done share prices no harm.

Repaying business rates relief has done little harm to the City’s view of Sainsbury’s (LSE:SBRY), Tesco (LSE:TSCO) and Morrisons (LSE:MRW) after the trio conceded there’s more to retailing than the bottom line.

The move is costing the three listed companies well over £1 billion, but in the process of doing the right thing they’ve given investors a reminder about the strength of the sector overall. This is reflected in the resolute performance of their shares over the past couple of days, with Sainsbury’s now trading higher than where it started the week.

The bigger picture goes far beyond any red ink on City forecasts, with the repayments showing that investors can be at the forefront of driving sustainable corporate decision-making.

Shore Capital analyst Clive Black is still concerned about the move setting a precedent, however, and has pointed out that retail’s biggest pandemic winner, Amazon (NASDAQ:AMZN), is not paying any extra tax.

But the continued award of dividends has made it hard for the supermarkets to justify the relief, particularly when they’ve been in a privileged position of being able to stay open.

The boss of Clintons told the BBC recently that it was “grossly unfair” that supermarkets could sell greetings cards in the lockdown while his stores had to close because they are deemed non-essential. AO World (LSE:AO.) boss John Roberts fanned the flames last month when he said that supermarket directors should “ask their mum” whether to repay the business rates relief.

Sainsbury’s followed the lead of Tesco yesterday by giving up relief of £410 million for this year, as well as the £30 million it would have received for the first half of the 2022 period.

The move comes less than a fortnight before Sainsbury’s shareholders are due to receive an interim dividend payment of £71 million for half-year trading, as well as a special dividend of about £162 million in lieu of the previously withheld 2019-20 dividend.

The retailer points out that it incurred significant additional costs of £290 million in the first half of the financial year, which compares with rates relief of £230 million over the same period.

But sales and profits have been stronger than expected since then, especially during the second lockdown in England. CEO Simon Roberts said today he hoped the repayment of the tax break would go to help other retail business unable to open over the past month.

He now expects profits of at least £270 million for the year to March, compared with £586 million reported a year earlier. UBS noted that this shows Sainsbury’s had been on course for £680 million prior to today’s repayment, well ahead of the City’s consensus of £640 million.

For the next year, Roberts is confident of beating the March 2020 outturn, despite forgoing £30 million of business rates relief. The retailer now expects to hit its debt reduction target by 2023 instead of 2022, which after including a £440 million business rates hit, suggests to UBS that underlying cash flow has been very strong.

The broker has a price target of 275p and said any weakness in the stock was a buying opportunity. Shares today recovered 4% to 218.1p.

The UBS team added: “Although the near-term debt target has been pushed out, trading is evidently better than expected and the dividend is protected.”

On the decision of Tesco to hand back £585 million, they added: “We do not expect the decision to impact Tesco directly from a valuation point of view, but it may reflect well from the standpoints of governance and societal stakeholder management.”

UBS has a price target of 315p on Tesco, compared with 227.1p today. Morrisons, which is also repaying £274 million, was today flat at 178.2p.

 

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