Category Archives: The In & Out

Marshall Plan B?

Naughty Balfour Beatty has broken the golden rule: The conceived wisdom is that profit warnings come in three. Well, Balfour has just delivered its fifth in less than two years and is in danger of losing its last smidgen of credibility. Analysts now consider the company “impossible to value” and Westhouse Securities have even taken the drastic step of withdrawing their price target for the company. The current problems at Balfour have been caused by a series of building contracts which were won at cheap prices during the recession but where labour and material costs subsequently spiralled out of control. The question now on everybody’s lips is whether there is a much larger black hole that has yet to be identified. KPMG, appointed to investigate the company’s underperforming construction arm, is on the case. Carillion’s recent failed approach now looks more like a lucky escape than defeat. That is the conceived wisdom, anyway. But watch this space: Balfour may be down, but certainly not out. And it is quite conceivable that this is the nadir of its travails. Certainly not for widows & orphans… but when there is blood in the streets it’s often the best time to pounce. Chairman Steve Marshall is on his way out, thank God for that. Hope for Marshall Plan B? Further reading: Undone!

Sick of Sainsbury’s?

Has turned Snap up Sainsbury’s! into Sick of Sainbury’s? Hedge funds and traders have bet heavily on a fall of J Sainsbury shares as concern mounts of a sharp deterioration in trading and an imminent, drastic dividend cut. The company is now the most shorted in the FTSE 100 with almost 20% of stock out on loan: This translates into £700m. The result: Saisnbury’s s/p has plunged by 30% since the beginning of the year and has hit a 5-year low.

Despite having been the best performer of the ‘big four’, increasing competition from Aldi and Lidl have clearly taken their toll. However, the real reason for investors’ concern is probably the accounting crisis at rival Tesco. It’s all about the ‘contagion’ factor: The question is whether or not Sainsbury’s corporate culture may have caused similar issues that are yet to be revealed. If Tesco has overstated profits – and no doubt, £250m is just the opening shot for much worse to come – then why not Sainsbury’s?  Almost every retailer will be looking at their commercial income now.

The retail environment – and the grocery sector in particular – has changed dramatically over the last 5 years and unless the big fours dinosaurs face up to reality, they will face extinction. The ‘new’ retail is about establishing a well-defined niche. The customer wants to know what a ‘label’ stands for. Waitrose and Aldi have got it sussed; so have Prada and Primark. The consumer is less obsessed with ‘brand’ and ‘image’ but more with ‘DNA’ and the proof is, as ever, in the pudding: Before the great crunch, a loyal Waitrose customer would not have been seen dead shopping at Aldi. Now it’s not only ‘cool’ but also makes sense: The consumer has become by far more sophisticated. Kate Moss, another trend setter, wouldn’t dream wearing 100% Steve McQueen… how naff is that? At least the pair of socks will be sourced at Primark – just to take the ‘edge off’… The Duchess of Cambridge, too, has embraced this concept to great effect… and, of course, to the delight of both high- and low-end retail.

Sir Ken Morrison has got it sussed. Ignore his recent outburst at your peril: Loose your DNA and you’ll perish. Sainsbury’s, too, face massive challenges but appeared to be tackling these issues more successfully than Tesco, albeit rather too slowly and its recently announced trial tie-up with discounter Netto is unconvincing.  Astute or desperate? The jury is out. Targeting the less affluent north is a clever strategic move. No doubt, Sainsbury’s have learnt from Morrisons ill-fated decision to move south! The million dollar question is whether or not Sainsbury’s will succeed in establishing an entirely separate entity without diluting the company’s original ‘DNA’ as a middle-ground retailer.

Retail analysts pressing for a price war, too, don’t seem to get the message. Slashing prices and reducing profit margins is not the answer; it will only provide a short-term blip in the landscape. Radical action is needed: Break ‘em up! Especially in the case of Tesco which is suffering from a serious identity crisis. Only a few weeks ago, Britains biggest retailer added ‘property developer’ to its ever expanding portfolio. Nobody knows what this company stands for or, indeed, what it is. Supermarket? Restaurant (Giraffe!)?, coffee shop chain (Harris & Hoole)?, tech retailer (Huddle), insurance company?, bank? and so the list goes on… .

Last but not least, the ‘big four’ have to stop running scared of Aldi et al: The German discounters will not be taking over the world and, for once, the old adage: “If you can’t beat them, join them” may not apply. In a recent brilliant analysis for The Times, Ian King put his finger on the spot: “This free pass for the German duo has gone on far too long. Consumer affairs correspondents who are normally tigers in trashing big banks, energy companies and, indeed, the other supermarkets for any suggestion that they are “ripping off” the public behave more like neutered tabbies when covering Aldi and Lidl. To read some of the coverage, one would believe that the pair were retail alchemists, able to sell fantastic products at unmatchable prices.” Mr King raises many more questions, ranging from dubious sales tactics to nebulous tax arrangements. His most important point, however, is simple: “You cannot sell a Bentley for the price of a Ford.”

Back to Sainsbury’s: The company is due to deliver its first trading statement to the City on Wednesday. And it’s not looking good… Pinkers is happy to disclose to be an active investor in Sainsbury’s for all the reasons discussed in the previous post. Are we about to wobble? The answer is a firm NO. The negatives are only too obvious: Mike Coupe is perceived to be a Justin King clone and clones have rarely proved the right choice. An outsider with a fresh and more radical approach would have been preferable. Our guess is he will be out before long. Frankly, the sooner the better. Until then, the s/p will probably remain extremely weak and even at this level it is too early to top up. Still, even if the divi was cut by half, an entirely possible scenario and, indeed, a good rather than bad omen, implying drastic action to preserve cash rather than keeping the pension funds happy, a yield of around 3.5% would still be perfectly acceptable.

In conclusion: Too early to buy, but do not ditch. Sainsbury’s remains the best play in the sector but it could easily take up to 5 years before a true renaissance, probably coinciding with the German discounters eventual decline.

Further reading: Nuclear fallout? and Saintly Sainsbury’s!