I have been fairly bullish on Sainsbury’s (LSE: SBRY) shares for the past few months. It would not, perhaps, be my most certain investment, but everything I looked at seemed to suggest it was worth more than the market was saying.
Much of this undervaluation (as I see it) is on the back of its failed Asda bid, which has seen the company’s share price down almost 40% in the past 12 months. When Sainsbury’s revealed £500m worth of cost-cutting efforts this week, I hoped we might be seeing the end of the Asda debacle.
Just like Tesco
One of the main benefits of the proposed Sainsbury’s takeover of Asda, had the competition commission not blocked the transaction, would have been cost savings for the company. Forced to find these economies elsewhere, the firm has set out a plan to do just that.
Like that other supermarket giant Tesco (LSE: TSCO) recently, Sainsbury’s has said it will be making moves with its mortgage book. While Tesco agreed to sell it mortgages to Lloyds (LSE: LLOY), Sainsbury’s has only affirmed it intention to immediately cease new mortgage sales.
Sainsbury’s did also say that it “will review what we do with the back book” – a hint perhaps, that it may also sell the loans to a bigger lender. As with Tesco, Sainsbury’s would potentially benefit from this sale as the market as been under increased pricing pressure in the low interest rate environment.
As with Tesco and Lloyds, Sainsbury’s should not struggle to find potential suitors for its mortgage book, as buying in existing mortgages will allow bigger banks to benefit from their higher returns relative to new loans at today’s rates.
Cost cutting
Mortgages are not the only arm of Sainsbury’s banking operations to see cuts – the firm said it would be injecting no more capital into banking services, which it sees as “too expensive to run”. An old adage perhaps, but one still worth listening to, may be for a company to stick to what it is best at.
Sainsbury’s will be making about £50m of savings through reduced pension contributions, and a reshuffle of its stores (of sorts) will bring about even greater savings. In particular, the company intends to shut down about half its legacy data centres, and close down about 70 stand-alone Argos stores, bringing them in-house at Sainsbury’s branches.
Investment potential
Sainsbury’s has tried to assure shareholders that it will not need to cut dividends or issue new shares, saying it is “confident in its ability to sustainably fund this investment”. This means that for the foreseeable future at least, its current 5% yield should hold – surpassing both Tesco and WM Morrison.
Sainsbury’s has also managed to establish a rather strong online presence, particularly with its food delivery service, and has even been exploring partnerships with Deliveroo and Uber Eats delivery services.
I doubt it will all be clear sailing from here on in, but I can’t help but think this latest news may be a good start for a share price recovery.
