sainsbury report final_merged

Performance: During the five year including estimate 2012E finan-

cial data, Sainsburys have managed to keep producing increasing rev-

enues and comprehensive income expect in 2009 recording a negative

comprehensive income.

Expansion: Sainsburys borrowings have increased in order to fi-

nance their growing company by opening more outlet and also diver-

sification into financial services.

Corporate Responsibility: Customers and other stakeholders have

gained the trust of Sainsburys to act responsibly on their behalf.

Sainsbury's goal is to offer their customers great quality product at a

reasonable price, since the financial crisis customers are more consci-

entious of how they spend.

Like for like Sales: Sainsburys performance during this period has

been exceptional with their like-for-like sales for the year 2.3%. With

this growth it has enabled the company to maintain a good level of

shareholders return (Year 2011 - Annual Report).

FIVE YEAR SUMMARY 3.51p 19 March 2011

SUMMARY

Recommendation BUY

Target price () 5.32

Shares (millions) 1872

ROCE (E2009) 24.71%

Beta 0.62

P/E (E2011) 14.76

P/B (E2011) 1.83

Total sales growth 4.9%

ANALYST EQUITY REPORT

Volume 1, Issue 1

J SAINSBURYS PLC

We have suggested a BUY recommendation for Sainsburys

share at 5.32p. Based on the calculation it suggested that Sains-

burys share price has been UNDERVALUED and we recom-

mended a BUY due to the Sainsburys potential domestic growth

and expansions within Britain as well as showing encouraging

performance during the 2008-2009 economic crisis.

EQUITY REPORT RESEARCH EUROPE

STUDENT ID- 1035280, AFSA

16/01/2013

Sainsbury is the third largest British retailer in the UK (Telegraph, 2012). Sainsbury became popular by

offering quality dairy products at low prices (Datamonitor 360, 2012) with main strong competitors such

as ASDA, Tesco, Marks and Spencer group and Morrison's. Sainsbury also engages in financial service,

property investments, fuel as well as retailing such as food other household items. Sainsburys have prov-

en to be high successful within the UK with market share of 16.3% (Sainsbury, 2012).

Aim of Report

Company Overview

Page 2 J SAINSBURYS PLC ID: 1035280

The main focus of this report is to analyse and in-

terpret the financial statement of Sainsbury for a

four year period (2008-2011) and also forecast their

2012 statements based on analyst reports and as-

sumptions. This is broken down into different parts

for detail breakdown of analysis and interpretation;

The first section will analyse Sainsburys finan-

cial position while also looking at their credit

status which will be compared to Tesco plc and

industry average. This will be done with the use

of ROCE and credit status ratios.

The second section involves the use of common

size and trend analyses to forecast Sainsbury

2012 financial statement based on analyst reve-

nue projection report. I will utilise the CAGR

formula to estimate my own judgment of the

revenue figure while also comparing it with the

actual 2012 financial statement..

The final section calculates the companys fore-

casted value of equity per share at the end of the

2011 with the use of Residual Earnings Model.

Throughout the analysis report for the four years

timeline (2008-2011), Tesco Plc will be used as

Sainsbury comparative competitor. The calculated

ratios will be used as a comparison medium between

the two companies. In order to draw conclusions

based on their financial performance over the four

year period.

Share price movement between Sainsbury's (Blue

Line) and Tesco (Red Line) from 20082011

For an effective equity analysis, both Sainsburys and Tescos financial statements (i.e. Balance Sheet,

Cash flow Statement and Income Statement) are reformulated. Reformulation of financial statements re-

quires the separation of financing and operating items in the financial statement. This differs from tradi-

tional credit analysis which classifies them into current and long term (Penman, 2010). All in all, reformu-

lation provides the following benefits (Penman, 2011); reformulating also help in distinguish different

components of income such as core operating income from sales, other core operating income, and unusu-

al items, which facilitates forecasting.

Reformulation of Financial Statements

Profitability Analysis

Ratio analysis for Sainsbury's:

Ratios (Level 1&2) Abbreviations 2008 2009 2010 2011

Return on Common Equity (%) ROCE 13.58 -9.05 10.33 12.41

Return on Net Operating assets (%) RNOA 10.70 -4.44 7.51 9.51

Operating Profit Margin (%) PM 4.23 -1.54 2.72 3.44

Asset Turnover ATO 2.53 2.87 2.76 2.76

Financial Leverage (%) FLEV 42.88 50.46 45.51 40.84

Net Borrowing Cost (%) NBC 3.98 4.71 1.32 2.41

RNOA - NBC 6.71 -9.14 6.19 7.10

FLEV x (RNOA-NBC) 287.87 -461.33 281.85 289.77

Operating Leverage (%) OLLEV 41.89 49.54 47.27 45.88

Maclaney (2002), states that ratio helps to provide an overview of the business financial condition; it is the

first step of assessing Sainsburys and Tesco in terms of performance, liquidity and solvency. The calculat-

ed profit analysis ratios (ROCE break-down) will help us establish Sainsburys and Tesco historic perfor-

mance over the period (2008 - 2011) -including the economic downturn in 2007-2008.


Ratio analysis for TESCO PLC:

Ratios (Level 1 & 2) Abbreviations 2008 2009 2010 2011

Return on Common Equity (%) ROCE 21.10 14.40 15.32 16.59

Return on Net Operating assets (%) RNOA 13.00 7.67 10.58 11.62

Operating Profit Margin (%) PM 5.33 3.60 4.63 4.94

Asset Turnover ATO 2.44 2.13 2.28 2.35

Financial Leverage (%) FLEV 63.00 96.42 69.82 55.71

Net Borrowing Cost (%) NBC 0.15 0.69 3.79 2.72

RNOA - NBC 12.85 6.98 6.79 8.91

FLEV x (RNOA-NBC) 809.68 673.12 474.16 496.14

Operating Leverage (%) OLLEV 50.86 63.59 71.05 73.72

Profitability Analysis (Continued)

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

2008 2009 2010 2011

%

Years

ROCE (2008-2011)

Sainsbury's

Tesco

Looking at the graph above, it shows that Sainsburys ROCE dipped very low in 2009 compared to Tesco.

This could be due to credit crunch crises which affected the whole economy especially consumer spend-

ing's. There are several value drivers ratios that could explain why Sainsburys ROCE fell lower than

Tesco. However, during the recession Sainsbury till managed to hold 16.1% market share compared to the

previous year of 15.8% (Farnham , 2009). Although, Sainsburys generated a negative operating profit of

(292.07) during this period.

Sainsbury ROCE recovered and rose to 12.41% in 2011, which was gradually increased from a negative (-

9.05%) in 2009.

RNOA ratio for Sainsburys showed a negative -4.44% in 2009. This could be due to having a negative

operating profit because of the economic crises in 2009 which had an adverse effect on the pension

scheme. It resulted in reductions in net operating assets in that year. However, Tescos RNOA ratio has

been more stable over the four year period compared to Sainsburys. In the aftermath of the economic cri-

sis, this made little impact on Tescos financial position due to its highly diversified business. Although,

Tesco suffered losses on their dirty surplus items such as pension scheme and foreign currency translation,

overall it led to a decrease in NOA which relatively led to a low RNOA in 2009. Furthermore, after 2009

both retailers saw growth due to improvements in the economy and thus an increase in consumer confi-

dence.



Net Borrowing Cost (NBC) - on average both Sainsburys and Tesco have 3.11% and 1.83% NBC ratio

respectively. Sainsburys had the highest NBC between 2008-2009, which worsen in 2010 and gradually

improved by 2011. While, Tescos NBC was at its lowest in 2008, which gradually improved by 2010. This

meant that Tesco cost of borrowings dropped, when interest rate decreased to 2.0% in 2008 (HouseWeb,

2012). This suggested that on average Tesco were better strategically by taking advantage of the fall in in-

terest rate by borrowing more compared to Sainsburys who did not make use of the fall in interest rate.

The graph below shows the difference in both companies total borrowing (short term and long term) during

the four year period.

Operating Profit Margin (PM)- in 2008, 2010 and 2011 both companies had a stable and positive PM.

But in 2009, Sainsburys had a negative PM which was down to the effect of the economic crisis, this grad-

ually improved by 2010. Regardless of the economic crises both companies still managed to generate in-

creased sales revenue throughout the four year timeline which did not have a major influence on a dramatic

increase in cost of sales.

Several articles revealed that both retailers implemented price war strategic plans between other competing

market share retailers in order to attain a favourable profit margin.

Asset Turnover (ATO) Over the four year period,

ATO for both firms has been fairly constant consid-

ering consumer attitudes towards spending in reces-

sion. Although in 2009 when the economy per-

formed poorly, it had a positive effect on Sains-

burys ATO. Compared to Sainsburys in this year,

Tesco generated a lot more sales revenue than Sains-

burys during this period. However, Tesco was less

efficient in using its assets to generate revenue in this year in comparison to Sainsburys and other years.

Sainsburys cash flow statement (Cash Investment (I)) shows that the firm invested in joint venture and

associates - IT services firm (Taylor, 2012) in order to be provide better online services. However, compare

to Tesco who invested heavily on PPE which can be concluded to be their highest investment throughout

the four years. In order to improve efficiency and ATO overall, Tesco should be cautious in what it invests

in during uncertain economic periods. For example, Sainsburys did not invest heavily on operating assets

but rather utilised existing assets. ATO can also be broken down into different levels such as Inventory and

PPE turnover. For the breakdown calculation ATO refer to Appendix 4.1a. On average both Sainsburys

and Tesco have 2.73 and 2.30 ATO respectively.

0.00

1.00

2.00

3.00

4.00

2008 2009 2010 2011

%

ATO (2008-2011)

Sainsbury's

Tesco



Operating Spread (SPREAD) (RNOA>NBC) - Both Sainsburys and Tesco had a desirable Operating

Spread over the four year on average (except year 2009), especially in 2011 for Sainsburys and 2008 for

Tesco. In situations when a positive spread is achieved it means the chances of shareholders receiving

greater return are high. This suggests that Tesco and Sainsburys have earned more returns on their Net Op-

erating assets to be able to cover the borrowing costs. Sainsburys obtained a negative NBC in 2009 as

RNOA was less than NBC. Year 2009 was a generally poor economy for both retailers and the general

public, it affected Sainsburys in which a negative Spread of -9.14% was attained. The manager at Sains-

bury did not do a good job i.e. a higher costs of borrowing was incurred due to poor decision making dur-

ing the financial crises in 2009. The managers went over optimum borrowing levels, which meant that all

financial liabilities could not be covered by operating income and also it led to attaining a high gearing ra-

tio (FLEV). This could have been avoided if careful attention was paid to financial liabilities and the bor-

rowings of finance was wrongly timed.

Operating Liability Leverage - Sainsburys have managed to maintain their ratio below 50% while

Tescos ratio shows continuous increase throughout the four year period. Tescos continuous increase

could be due to generated higher operating liabilities and revenues mainly because they have many outlets

compared to Sainsburys. Sainsburys ratio was at its maximum in 2009 and after that it declined.


0

5000

10000

15000

20000

2008 2009 2010 2011

Axis

Title

Years

Total Borrowings (2008-2011)

Sainsbury's

Tesco


Financial Leverage (FLEV) - Sainsburys is not as geared as Tescos which ratio stood at 96.4% in

2009, while Sainsburys was at 50% for the same year. Tescos high gearing ratio was because of the in-

crease in lending in the wake of low interest rate. Overall, it can be said that Sainsburys were less risky in

comparison to Tesco. One of the main reasons why Tesco was highly geared in 2009 could be due to the

fall in interest rate in the UK. Unfortunately, Sainsburys did not take advance of the fallen interest rate but

rather they played safe in order to avoid huge finance cost due to the uneven market. After 2009, borrowing

for both retailers gradually decrease by a low percentage and this was expected to reduced FLEV - this was

reflected in years 2010 & 2011.

Analysis of Credit Status and other performance ratios

For most creditors, they are concerned about a firms ability to meet its short-term and long-term obliga-

tions through analysing their liquidity, solvency and operating ratios based on the reformulated financial

statements i.e. income statement. The commonly recognised ratios will be used to analyse the credit and

liquidity status of Sainsburys and its competitor Tescos.

Stock turnover days for both Sainsbury and Tesco have averaged 17 days. Both Sainsburys and Tesco

have managed to maintain a 14days and 20days stock turnover days respectively which are slightly high

but as long as the perishable goods are often rotated. However, both companies also stock domestic items

which are less likely to be influenced by technological changes within their holding period. Overall, both

retailers have managed to keep an eye on the amount of stock by knowing their Economic Order Quantity

(EOQ) which reflected on their steady stock turnover ratios over the four years. Sainsburys better perfor-

mance on this ratio than its competitor is because they hold less stock than Tesco, which means Tesco

takes longer to replenish its stocks

Debtors Days - Sainsburys have a relatively average of four debtor days for the first three years, which

gradually increased to 5days after the financial crises. Due to Sainsburys policy, majority of their custom-

er transactions are done on a cash basis which means less credit sales are offered to customers. Compared

to Tesco which has increasing debtors days, this could signify that credit sales are offered to customers in

order to generate more revenue. Due to high diversification by Tesco in the market, there is incentive to

increase their debtors to increase customers.


Analysis of Credit Status/ other performance ratios (Continued)

Other Performance Ratios 2008 2009 2010 2011

Debtors Days 4.22 3.76 3.93 5.93

Creditors Days 49.43 50.80 47.67 47.53

Current Ratio(:1) 0.66 0.55 0.66 0.58

Quick Ratio(:1) 0.40 0.31 0.41 0.31

Stock Turnover Days 14.76 14.07 13.57 14.86

Interest Cover (times) 4.02 4.55 4.80 7.34

Gross Profit Margin(%) 5.62 5.48 5.42 5.50

Cash Flow to Sales(%) 5.08 5.38 5.47 4.51

Cash Flow to Assets(%) 8.96 10.13 10.07 8.35

Other Performance Ratios 2008 2009 2010 2011

Debtors Days 10.12 12.08 12.11 13.86

Creditors Days 60.82 62.08 65.89 68.49

Current Ratio(: 1) 0.61 0.78 0.73 0.67

Quick Ratio(t:1) 0.38 0.63 0.56 0.49

Stock Turnover Days 20.31 19.44 19.04 20.66

Interest Cover (times) 11.46 6.94 6.03 8.01

Gross Profit Margin(%) 7.67 7.76 8.10 8.30

Cash Flow to Sales(%) 7.83 8.43 9.40 7.36

Cash Flow to Assets(%) 12.27 9.94 11.62 9.50

Creditors Days - Creditors days for Sainsburys and Tesco reveals that they both obtain payments from

their debtors first before paying their creditors. This should reflect a better working capital for both retail-

ers. In 2009, it took Sainsburys few days longer than average to pay their creditors due to the economic

situation. However, Tescos creditors days continued to rise which meant they took longer to pay their

creditors than Sainsburys after 2009. This could have been the result of a stronger relationship between

Tesco and its suppliers resulting in stronger cash flow statement. Sainsburys suppliers on the other hand,

seems to requests their payment earlier after 2009 - which is reflected on their ratio i.e. decreasing (2009-

2011).

Sainsburys other ratios

Tescos other ratios

Current Ratio - The higher the current ratio, the more capable the company is of paying its obligations

(Investopedia 2012). Sainsburys and Tesco were able to cover their short-term financial obligations but

the ratio was not strong enough. On average, Sainsburys has (0.61:1) while Tesco had (0.70:1). However,

in 2011 Sainsburys ratio dropped slightly which was below the industry average when industry average

was at 0.60:1(Thomson One Banker, 2013).

Over the four year period, Sainsburys current ratio seems rather unpredictable, while Tescos current ratio

increased from 2008-2010 and later decreased slightly by 2011. The fall in interest rate cause Tescos in-

creased current ratio which led to Tesco borrowing more and having more cash in hand in order to survive

during the financial crises. While Sainsburys utilised their liquidity assets for promotion and marketing

which seemed profitable and generated increased sales revenue, but worsened current ratios.



Quick Ratio- is an indicator of short term liquidity and also the ability for the companies to meet its short

term obligation without the use of its liquid assets. The ratio calculated for Sainsburys and Tesco show

the ability to both of them surviving without relying on stock (inventory). Sainsburys ratio is rather unsta-

ble and unpredictable either it will increase or decrease. Unlike Tesco, thia ratio increased from 2008-2010

and later decreased in 2011. The calculated ratio signifies that on average Tesco relies more on their stock

compared to Sainsburys.

The decline in Sainsburys quick ratio may have resulted from Sainsburys missed opportunities to borrow

funds when interest rates were low, as cash held declined slowly over the four year periods. Moreover in

2011, Sainsburys held the least cash in comparison to other years and also industry average ratio is the ra-

tio the same as Sainsburys ration 0.31:1 (Thomson One Banker, 2013)

0.00

0.50

1.00

2008 2009 2010 2011

Ra

tio

(:1

)

Years

Sainsbury's Quick & Current Ratio

Quick Ratio

Current Ratio0.00

0.50

1.00

2008 2009 2010 2011

Ra

tio

(:1

)

Years

Tesco's Quick & Current Ratio

Quick Ratio

Current Ratio

Gross Profit - Sainsburys gross profit ratio

appears to be decreasing from 2008-2010.

But regardless of the decrease in the ratio,

Sainsburys still managed to maintain in-

creasing healthy revenue each year. However,

cost of sales also increased which contributed

to the slight decrease in the ratio. On the oth-

er hand however, Tescos ratio showed a con-

tinuous increase in its gross profit ratio which

was mainly due to the increase in sales turnover. The fall in Sainsburys ratio could be due to lack of bar-

gaining power in terms of negotiations with their creditors in order to receive better discounts for goods.

Sainsburys ratio in 2011 seems to be above the industry average which was at 6.85. This means on aver-

age they are performing okay.

0.00

5.00

10.00

2008 2009 2010 2011

%

Years

Gross Profit Margin

Sainsbury's

Tesco



Cash flow to Assets this ratio helps to measures how well a company is able to generate operating cash

from its current operating activities. Both Tescos and Sainsburys ratios has been unstable over the time-

line. The ratio is affected when either of the retailers invests or sells fixed assets or an increase/decrease in

cash from operations. Sainsburys was very efficient in 2009 as Tesco was also in 2008. Nevertheless, in

2011 both retailers total assets were at the highest which made the ratio to fall to its lowest. As a result,

both retailers were not efficient in maximising the full capacity of their assets as less cash was generated

from operations.

Cash flow to Sales the higher the ratio the better, because it indicates the level the companys financial

strength. The ratio also indicates the ability for both Sainsburys and Tesco to translate their sales into cash

(proportion of cash from operations in overall sales).

Both companies experienced an improvement in the ratio up until 2010. The decrease in 2011 was due to

both companies experiencing a decrease in cash from operations as sales continued to rise. I personally

think that the increased rate at which Tesco offered credit sales to their customers might have had an ad-

verse impact on the ratio.

Interest Cover - A high interest cover ratio means that a business can easily meet its interest obligations

from profits (Bized, 2012). The ratio tells how easily Sainsburys and Tescos can pay interest on their

outstanding debts. Sainsburys had much lower interest cover in comparison to Tescos over the four year

timeline. Which means Tesco can cover their interest debt many times than Sainsburys. For example,

Tesco were able to cover their interest twelve times in 2008 while Sainsbury could only cover theirs four

times. Again, based on the financial crisis in 2009 Tescos ratio decreased, this could also be due to in-

crease in borrowings while Sainsburys ratio still gradually increased from 2008 - 2011. A lower interest

cover could mean danger to a business, but luckily

Sainsbury ratio peaked in 2011 mainly because Sains-

burys finance cost was at its lowest during this period.

Overall, Sainsburys ratio was much lower than

Tescos, this could be due to Sainsburys have a lower

total borrowings (short and long term borrowings) in

comparison to Tescos . It is still uncertain why Sains-

burys borrowed lesser amount when they could have

taken the advantage of a reduce interest rate at 0.5%.

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

2008 2009 2010 2011

Tim

es

Interest Cover

Sainsbury

Tesco


This part aims to explain how Sainsburys forecasted equity share price was arrived at the end of the fourth

year (2011). Based on my evaluation, the calculated value of Sainsburys share might help investors into

making the right decision on either to buy, sell or hold Sainsburys shares.

By using Residual Earnings Model which is the most commonly used model by analyst (Investopedia,

2012) , the share price calculated by using this model will be compared to the actual share price of Sains-

burys as at 19th March 2011.

In order to calculate my own estimation of 2012s revenue, I made use of the Compound Annual Growth

Rate (CAGR) - RBS (analysts) use the same method for forecasting (Scarborough, 2012).

I chose to use this model for forecasting 2012 revenue and used the common size and trend analysis to

forecast the rest of the income statement.

The formula accounts for growth rate changes from year to year (4.29%) which was later multiplied with

2011 revenue in order to arrive at my own predictions of 2012 revenue figure - which was close to the ac-

tual and other analyst revenue figures. The analyst revenue figures includes macro-economic factors such

as cost of inflation, but these predictions varies from analyst to analyst so it can tend to be subjective.

CAGR Model Rate 4.29%

Year 2011 Revenue 21102

CAGR Model Revenue 22007

Analyst Revenues

RBS 22540

Evolution Securities Plc 22085

Santander 22325.6

My predicted Revenue was quite close to the actual 2012 Revenue (22,294 m). The next stage was to

gather twenty four years worth of Sainsburys share prices and FTSE ALL SHARE price index

(Appendix 1.3a). I was able to calculate the return index for both Sainsburys and FTSE ALL SHARE.

This enabled to arrive at a beta by using the regression analysis tool.


Forecasting and Share Price Valuation

ANOVA

df SS MS F Signifi-cance F

Regression 1 0.260358339 0.260358 52.47244 4.03E-12

Residual 287 1.424039673 0.004962

Total 288 1.684398012

Coeffi-cients

Standard Er-ror t Stat P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.001231 0.004166711 0.295457 0.767858 -0.00697 0.009432 -0.00697 0.009432

X Variable 1 0.618599 0.085397227 7.243787 4.03E-12 0.450515 0.786684 0.450515 0.786684

CAPM can be described as a model that describes the relationship between risk and expected re-turn and that is used in pricing risky securities (Investopedia, 2013)

(Investopedia, 2013)

Through this method (CAPM) I was able to arrive at Sainsburys cost of equity at 7.58%. The true worth

of a companys share price is very important to shareholder and other stakeholders (such as investors) in

order to aid them in buying or selling shares.

The calculated forecasted value of equity per share was estimated based on Evolution Security Plc (analyst)

forecasted revenue estimate and the actual 2011 data. The Residual Earning Model has been used to val-

ue Sainsburys share price as at the end of March 2011. Three different assumptions have been put into per-

spective when using this formula to calculate the earnings per share. While calculating the third case per-

spective (Case 3), 0.7% economic GDP was used since retailer industry has been growing in line with the

economy which was at 0.7% in 2011 (BBC, 2012).

By using a regression analysis tool I was able to arrive at Sains-

burys Beta which was later used in conjunction with CAPM to

calculate Sainsburys Cost of Equity.


Forecasting and Share Price Valuation Continuation

Forecasting and Share Price Valuation Continuation

Valuation : Residual Earnings (RE) Model

2011 (m) E2012 (m)

Reformulated Income statement

Operating income 726.48 773.11

Net financial expenses

-53.48 -51.87

Comprehensive income (included the amount for MI)

673.00 721.24

Reform. Balance Sheet

Net operating assets 7639.00

Net financial obligations 2215

Ordinary shareholders' equity (included MI) 5424.00

Residual Earnings 310.1

Case 1: Assume that RE after 2012 would be zero because of strong competition in the in-

dustry.

Intrinsic value of BT's equity in 2011 5712.25

Intrinsic per share value (s) 3.05

Intrinsic P/B 1.05

Intrinsic P/E 8.49

Case 2: if it assumes that REs after 2012 will remain as 310.1 forever.

Intrinsic value of BT's equity in 2011 9515.04


Intrinsic P/B 1.75

Intrinsic P/E 14.14

Case 3:Assuming the growth rate is 0.7% based on the economy GDP

Intrinsic value of BT's equity in 2011 9931.28 9931.28


Intrinsic P/B 1.83

Intrinsic P/E 14.76

Additional information:

Share price of Sainsbury on 19 March 2011 is 3.51, source: Sainsbury's Annual Report

Therefore, the market over values Sainsbury's share

From my calculation Cost of Equity is 7.58%

No. of shares outstanding is 1872 million, from Sainsbury 2010/2011 annual report.


SUMMARY

Analyst Share Price Assumption

Evolution Securities this analyst initiated a Reduce because Sainsburys did not deliver the total sales

growth target of 8% but rather they achieved 7.5%. And also the analyst believe that with Sainsburys un-

derling growth which were currently unimpressive, in addition with market deterioration and growth rate

getting weaker due to inflation. Evolution urges investors to sell Sainsburys shares at a target price of

350p.

Santander However, this analyst suggested a Hold of Sainsburys share at target price of 400p due to

Sainsburys attaining three times growth on non-food items which driven by Sainsburys opening new out-

lets in order to boost sales. This means that management strategies have proven to be successful and can be

seen in the foreseeable future.

RBS finally, RBS suggested a Hold at the target price of 370p. This is due to Sainsburys performing very

well in the third quarter or 2011. Although sales growth target are not been achieve, RBS are positive

Sainsburys can have continuous development in their business model.


The Residual Earnings Model suggests that Sainsburys share price should be currently at a value of 5.31.

In comparison to the actual share price of 3.51 as at 19th March 2011. The estimated share price is dif-

ferent from the actual which means that the market has undervalued Sainsburys shares. Residual earnings

model assumes three different cases in calculating the share price of Sainsburys.

RBS suggested that investors should Hold on the bases that the share price is likely to increase between the

financial year of 2010-2013 and with EPS CAGR of 10%.

In conclusion, the market has undervalued Sainsburys share and I believe that it has the potential to rise

to the target price of 5.31. I would advice investors to buy and hold.

APPENDICES 1.1 SWOT ANALYIS OF J SAINSBURYS

Strengths Weaknesses

Significant market presence in the UK

Robust portfolio of own-labelled products

Strong results in tough economic and macro envi-ronment

Concentration of operations in the UK could affect the performance in case of any unfavourable eco-nomic scenario

High debt burden

Opportunities Threats

Growth opportunities in the Chinese and Indian economies

Growth potential in the online distribution channel

Rise in demand for organic foods

Rising labour cost in the UK

Weak consumer spending in the UK

Intense competition


Datamonitor 360 (2012)

APPENDICES 1.2 INDUSTRY AVERAGE AS AT 19TH MARCH 2011

Industry Benchmark Ratio analysis :

Credit Status Ratios 2011

Stock Turnover Days 23.00

Current Ratio (to 1) 0.60

Quick Ratio (to 1) 0.31

Debtors Days 11.48

Gross Profit Margin(%) 6.85

Cash Flow to Sales(%) 5.66

Thomson One Banker, (2013)
file:///C:/Users/Tosin/Downloads/J%20Sainsbury%20plc.doc#strengths#strengthsfile:///C:/Users/Tosin/Downloads/J%20Sainsbury%20plc.doc#weaknesses#weaknesses

APPENDIX 1.3a

DATASTREAM DATA OF SAINSBURY AND FTSE ALL SHARE RETURNS

Start 19/02/1987 End 19/03/2011 Frequency M

Name SAINSBURY (J) - PRICE - LNGBP

FTSE ALL SHARE - PRICE INDEX

Code 926002(P.LNGBP) FTALLSH

Return

Return (FTALLSH)

CURRENCY

19/02/1987 235.31 960.83 19/03/1987 244.14 994.65

0.037525 0.035198734

19/04/1987 234.33 979.12

-0.04018 -0.015613532

19/05/1987 260.81 1103.1

0.113003 0.126623907

19/06/1987 284.34 1137.25

0.090219 0.030958209

19/07/1987 279.43 1234.49

-0.01727 0.085504506

19/08/1987 257.86 1120.81

-0.07719 -0.092086611

19/09/1987 274.26 1188.42

0.0636 0.060322445

19/10/1987 232.37 1074.58

-0.15274 -0.09579105

19/11/1987 224.53 824.11

-0.03374 -0.233086415

19/12/1987 218.65 867.07

-0.02619 0.052128963

19/01/1988 223.55 902.5

0.02241 0.040861753

19/02/1988 212.76 889.24

-0.04827 -0.014692521

19/03/1988 232.37 951.46

0.09217 0.069969862

19/04/1988 241.2 925.79

0.038 -0.026979589

19/05/1988 218.65 909.69

-0.09349 -0.017390553

19/06/1988 220.61 956.27

0.008964 0.051204256

19/07/1988 218.65 961.03

-0.00888 0.004977674

19/08/1988 213.74 961.62

-0.02246 0.000613925

19/09/1988 197.57 912.59

-0.07565 -0.050986876

19/10/1988 202.96 968.26

0.027281 0.061002203

19/11/1988 199.04 951.59

-0.01931 -0.01721645

19/12/1988 189.23 913.05

-0.04929 -0.040500636

19/01/1989 207.86 985.45

0.098452 0.079294672

19/02/1989 228.94 1058.89

0.101414 0.074524329

19/03/1989 217.66 1076.71

-0.04927 0.016828944

19/04/1989 225.51 1076.35

0.036065 -0.000334352

19/05/1989 237.27 1131.41

0.052148 0.051154364

19/06/1989 260.81 1103.16

0.099212 -0.024968844

19/07/1989 259.82 1170.28

-0.0038 0.060843395

19/08/1989 281.4 1204.75

0.083058 0.02945449

19/09/1989 279.43 1198.2

-0.007 -0.005436813

19/10/1989 247.08 1100.15

-0.11577 -0.08183108

19/11/1989 250.02 1115.15

0.011899 0.013634504

19/12/1989 253.94 1168.64

0.015679 0.047966641

19/01/1990 256.88 1169.46

0.011578 0.00070167

19/02/1990 257.86 1147.05

0.003815 -0.01916269

19/03/1990 256.88 1111.57

-0.0038 -0.03093152

19/04/1990 247.08 1085.2

-0.03815 -0.023723202

19/05/1990 266.69 1117.16

0.079367 0.029450792

19/06/1990 273.55 1168.35

0.025723 0.045821547

19/07/1990 296.1 1171.71

0.082435 0.002875851

19/08/1990 285.32 1065.7

-0.03641 -0.090474605

19/09/1990 298.06 1000.73

0.044652 -0.060964624

19/10/1990 301.99 1010.12

0.013185 0.00938315

19/11/1990 290.22 1009.06

-0.03897 -0.00104938

19/12/1990 302.97 1046.13

0.043932 0.036737161

19/01/1991 307.87 1006.8

0.016173 -0.03759571

19/02/1991 322.58 1115.14

0.04778 0.107608264

19/03/1991 340.22 1197.98

0.054684 0.074286637

19/04/1991 362.77 1220.16

0.066281 0.018514499

19/05/1991 370.62 1188.02

0.021639 -0.026340808

19/06/1991 339.24 1194.88

-0.08467 0.005774314

19/07/1991 368.88 1213.66

0.087372 0.015717059

19/08/1991 349.05 1216.23

-0.05376 0.002117562

19/09/1991 351.03 1253.48

0.005673 0.030627431

19/10/1991 354.01 1252.83

0.008489 -0.000518556

19/11/1991 327.23 1190.42

-0.07565 -0.049815218

19/12/1991 346.07 1146.78

0.057574 -0.03665933

19/01/1992 362.93 1213.08

0.048718 0.057814053

19/02/1992 365.91 1216.45

0.008211 0.002778053

19/03/1992 375.82 1186.78

0.027083 -0.024390645

19/04/1992 420.44 1268.47

0.118727 0.068833314

19/05/1992 463.58 1312.07

0.102607 0.034372118

19/06/1992 464.07 1248.12

0.001057 -0.048739778

19/07/1992 445.23 1168.05

-0.0406 -0.064152485

19/08/1992 434.33 1122.95

-0.02448 -0.038611361

19/09/1992 426.89 1204.37

-0.01713 0.072505454

19/10/1992 472.01 1206.68

0.105695 0.001918015

19/11/1992 486.88 1284.33

0.031504 0.064350118

19/12/1992 547.87 1333.41

0.125267 0.038214478

19/01/1993 554.31 1330.19

0.011755 -0.002414861

19/02/1993 516.13 1387.47

-0.06888 0.043061518

19/03/1993 520.6 1421.34

0.008661 0.024411339

19/04/1993 462.09 1387.43

-0.11239 -0.023857768

19/05/1993 455.15 1393.51

-0.01502 0.004382203

19/06/1993 479.94 1422.43

0.054466 0.020753349

19/07/1993 454.16 1408.73

-0.05372 -0.009631405

19/08/1993 511.67 1521.01

0.126629 0.079702995

19/09/1993 446.23 1494.29

-0.12789 -0.017567274

19/10/1993 405.57 1545.92

-0.09112 0.034551526

19/11/1993 387.72 1533.12

-0.04401 -0.008279859

19/12/1993 446.23 1640.19

0.150908 0.069837977

19/01/1994 473 1743.78

0.059991 0.063157317

19/02/1994 362.93 1703.02

-0.23271 -0.023374508

19/03/1994 384.75 1624.88

0.060122 -0.045883196

19/04/1994 355.99 1582.94

-0.07475 -0.025811137

19/05/1994 390.7 1571.99

0.097503 -0.006917508

19/06/1994 413.01 1515.01

0.057103 -0.03624705

19/07/1994 396.65 1540.95

-0.03961 0.017121999

19/08/1994 436.31 1598.16

0.099987 0.037126448

19/09/1994 432.34 1543.64

-0.0091 -0.034114231

19/10/1994 395.65 1524.39

-0.08486 -0.012470524

19/11/1994 417.47 1554.22

0.05515 0.019568483

19/12/1994 395.16 1505.86

-0.05344 -0.031115286

19/01/1995 416.48 1503

0.053953 -0.001899247

19/02/1995 413.5 1505.8

-0.00716 0.001862941

19/03/1995 423.91 1513.96

0.025175 0.005419046

19/04/1995 413.5 1556.15

-0.02456 0.027867315

19/05/1995 435.81 1605.78

0.053954 0.031892812

19/06/1995 441.27 1654.2

0.012528 0.03015357

19/07/1995 459.12 1674.67

0.040451 0.012374562

19/08/1995 465.56 1728.26

0.014027 0.032000334

19/09/1995 455.15 1745.57

-0.02236 0.010015854

19/10/1995 419.45 1757.31

-0.07844 0.006725597

19/11/1995 378.8 1769.5

-0.09691 0.006936739

19/12/1995 363.92 1754.28

-0.03928 -0.0086013

19/01/1996 413.5 1831.99

0.136239 0.044297376

19/02/1996 382.76 1843.95

-0.07434 0.00652842

19/03/1996 372.85 1835.38

-0.02589 -0.004647631

19/04/1996 358.47 1924.17

-0.03857 0.048376903

19/05/1996 382.76 1901.77

0.06776 -0.011641383

19/06/1996 388.71 1883.36

0.015545 -0.009680456

19/07/1996 370.86 1841.45

-0.04592 -0.022252782

19/08/1996 402.59 1908.96

0.085558 0.036661327

19/09/1996 371.85 1957.02

-0.07636 0.025176012

19/10/1996 353.01 1987.45

-0.05067 0.015549151

19/11/1996 362.43 1954.08

0.026685 -0.01679036

19/12/1996 375.82 1979.85

0.036945 0.013187792

19/01/1997 393.17 2061.07

0.046166 0.04102331

19/02/1997 313.35 2121.75

-0.20302 0.029441019

19/03/1997 325.74 2115.4

0.03954 -0.002992813

19/04/1997 324.26 2092.44

-0.00454 -0.010853739

19/05/1997 363.92 2211.91

0.122309 0.057096022

19/06/1997 358.96 2210.2

-0.01363 -0.000773088

19/07/1997 424.91 2284.14

0.183725 0.033453986

19/08/1997 437.3 2317.83

0.029159 0.014749534

19/09/1997 443.75 2362.31

0.01475 0.019190363

19/10/1997 461.6 2480.18

0.040225 0.049896076

19/11/1997 472.5 2285.91

0.023614 -0.078328992

19/12/1997 484.9 2361.28

0.026243 0.032971552

19/01/1998 499.28 2467.54

0.029656 0.045001016

19/02/1998 449.7 2647.24

-0.0993 0.072825567

19/03/1998 502.75 2797.33

0.117968 0.056696786

19/04/1998 477.96 2777.16

-0.04931 -0.007210447

19/05/1998 511.18 2794.62

0.069504 0.006286998

19/06/1998 515.64 2726.87

0.008725 -0.02424301

19/07/1998 525.06 2882.73

0.018269 0.057157107

19/08/1998 529.52 2646.95

0.008494 -0.081790525

19/09/1998 540.43 2354.83

0.020604 -0.110360982

19/10/1998 569.19 2348.1

0.053217 -0.002857956

19/11/1998 510.68 2567.36

-0.1028 0.093377624

19/12/1998 460.6 2607.39

-0.09807 0.015591892

19/01/1999 431.85 2730.74

-0.06242 0.047307844

19/02/1999 363.18 2764.7

-0.15901 0.012436189

19/03/1999 359.46 2847.18

-0.01024 0.029833255

19/04/1999 411.52 3010.25

0.144828 0.057274215

19/05/1999 407.06 2911.37

-0.01084 -0.03284777

19/06/1999 381.77 3028.03

-0.06213 0.040070482

19/07/1999 386.98 3030.3

0.013647 0.000749662

19/08/1999 406.81 2886.03

0.051243 -0.047609148

19/09/1999 409.29 2846.58

0.006096 -0.013669297

19/10/1999 373.34 2799.26

-0.08784 -0.016623457

19/11/1999 315.58 3033.78

-0.15471 0.083779285

19/12/1999 326.24 3150.24

0.033779 0.038387754

19/01/2000 349.05 3069.72

0.069918 -0.025559957

19/02/2000 288.31 2948.99

-0.17402 -0.03932932

19/03/2000 251.37 3126.18

-0.12813 0.060084978

19/04/2000 304.67 2937.83

0.212038 -0.06024925

19/05/2000 337.89 2892.43

0.109036 -0.015453583

19/06/2000 298.72 3095.44

-0.11593 0.07018666

19/07/2000 306.41 3102.86

0.025743 0.002397074

19/08/2000 322.27 3143.84

0.051761 0.01320717

19/09/2000 361.44 3084.07

0.121544 -0.019011782

19/10/2000 366.9 2977.26

0.015106 -0.034632807

19/11/2000 424.41 3085.5

0.156746 0.036355575

19/12/2000 409.54 3009.03

-0.03504 -0.024783666

19/01/2001 338.14 2992.06

-0.17434 -0.005639691

19/02/2001 381.77 2944.93

0.129029 -0.015751689

19/03/2001 369.87 2688.78

-0.03117 -0.086979996

19/04/2001 390.7 2818.19

0.056317 0.048129635

19/05/2001 421.44 2860.21

0.078679 0.014910279

19/06/2001 422.43 2753.8

0.002349 -0.037203562

19/07/2001 425.4 2628.57

0.007031 -0.045475343

19/08/2001 385.49 2590.61

-0.09382 -0.014441312

19/09/2001 366.9 2272.17

-0.04822 -0.122920856

19/10/2001 349.79 2406.13

-0.04663 0.058956856

19/11/2001 373.84 2578.75

0.068756 0.07174176

19/12/2001 347.31 2478.95

-0.07097 -0.038700921

19/01/2002 372.85 2487.99

0.073537 0.003646705

19/02/2002 404.58 2461.12

0.085101 -0.010799883

19/03/2002 392.18 2571.43

-0.03065 0.044821057

19/04/2002 394.66 2548.05

0.006324 -0.009092217

19/05/2002 386.23 2537.41

-0.02136 -0.004175742

19/06/2002 347.06 2270.73

-0.10142 -0.105099294

19/07/2002 317.32 1995.47

-0.08569 -0.121220929

19/08/2002 325.25 2128.84

0.024991 0.066836384

19/09/2002 308.89 1852.07

-0.0503 -0.130009771

19/10/2002 268.98 1973.16

-0.1292 0.065380898

19/11/2002 290.54 1966.6

0.080155 -0.003324616

19/12/2002 267.74 1850.02

-0.07847 -0.059279976

19/01/2003 244.93 1844.77

-0.08519 -0.002837807

19/02/2003 225.84 1762.53

-0.07794 -0.044580083

19/03/2003 235.01 1803.22

0.040604 0.023086132

19/04/2003 232.53 1867.76

-0.01055 0.035791528

19/05/2003 257.32 1915.87

0.10661 0.025758127

19/06/2003 256.83 2018.05

-0.0019 0.053333473

19/07/2003 260.79 2002.16

0.015419 -0.007873938

19/08/2003 288.31 2099.84

0.105526 0.04878731

19/09/2003 290.79 2111.57

0.008602 0.00558614

19/10/2003 271.7 2155.15

-0.06565 0.020638672

19/11/2003 295.75 2138.58

0.088517 -0.00768856

19/12/2003 300.21 2175.41

0.01508 0.017221708

19/01/2004 289.55 2244.62

-0.03551 0.031814692

19/02/2004 296 2253.94

0.022276 0.00415215

19/03/2004 294.76 2209.84

-0.00419 -0.019565738

19/04/2004 277.65 2264.9

-0.05805 0.024915831

19/05/2004 272.45 2217.22

-0.01873 -0.021051702

19/06/2004 277.4 2238.01

0.018168 0.009376607

19/07/2004 257.5 2157.19

-0.07174 -0.036112439

19/08/2004 257.5 2166.93

0 0.004515133

19/09/2004 278 2281.88

0.079612 0.053047399

19/10/2004 249 2308.58

-0.10432 0.011700878

19/11/2004 270.5 2370.35

0.086345 0.026756708

19/12/2004 266 2352.37

-0.01664 -0.007585378

19/01/2005 272.5 2422.06

0.024436 0.029625442

19/02/2005 300.5 2534.73

0.102752 0.046518253

19/03/2005 293.5 2476.21

-0.02329 -0.023087272

19/04/2005 291.25 2434.24

-0.00767 -0.016949289

19/05/2005 290.75 2472.76

-0.00172 0.015824241

19/06/2005 284.25 2544.59

-0.02236 0.029048513

19/07/2005 280 2600.39

-0.01495 0.021928877

19/08/2005 283.25 2661.32

0.011607 0.023431101

19/09/2005 283.5 2724.41

0.000883 0.023706281

19/10/2005 277.5 2587.2

-0.02116 -0.050363198

19/11/2005 288.5 2765.34

0.03964 0.06885436

19/12/2005 309 2803.53

0.071057 0.013810237

19/01/2006 305.25 2888.41

-0.01214 0.030276116

19/02/2006 318.75 2979.74

0.044226 0.031619472

19/03/2006 330 3062.18

0.035294 0.027666843

19/04/2006 341 3102.69

0.033333 0.013229137

19/05/2006 331 2884.1

-0.02933 -0.070451769

19/06/2006 324.75 2865.1

-0.01888 -0.006587844

19/07/2006 334 2932.45

0.028483 0.023507033

19/08/2006 359.5 3001.06

0.076347 0.023396818

19/09/2006 372.75 2982.91

0.036857 -0.006047863

19/10/2006 395.25 3149.97

0.060362 0.056005713

19/11/2006 410.5 3184.87

0.038583 0.011079471

19/12/2006 408.25 3206.5

-0.00548 0.006791486

19/01/2007 434.25 3229.02

0.063686 0.007023234

19/02/2007 512.75 3340.86

0.180771 0.034635896

19/03/2007 557 3220.5

0.086299 -0.036026652

19/04/2007 530 3345.25

-0.04847 0.038736221

19/05/2007 556 3449.69

0.049057 0.031220387

19/06/2007 581 3436.71

0.044964 -0.003762657

19/07/2007 592 3433.75

0.018933 -0.000861289

19/08/2007 520.5 3128.97

-0.12078 -0.088760102

19/09/2007 554 3319.35

0.064361 0.060844303

19/10/2007 582 3355.25

0.050542 0.01081537

19/11/2007 408 3135.95

-0.29897 -0.065360256

19/12/2007 425.5 3192.35

0.042892 0.017984981

19/01/2008 399.5 3003.52

-0.0611 -0.059150782

19/02/2008 381.5 3053.21

-0.04506 0.016543922

19/03/2008 325 2840.75

-0.1481 -0.06958578

19/04/2008 379.5 3090.06

0.167692 0.087762035

19/05/2008 366.25 3243.48

-0.03491 0.049649521

19/06/2008 322.5 2905.97

-0.11945 -0.104057987

19/07/2008 298.5 2735.72

-0.07442 -0.05858629

19/08/2008 326.75 2710.74

0.09464 -0.009131051

19/09/2008 370.25 2708.98

0.133129 -0.000649269

19/10/2008 250.5 2050.84

-0.32343 -0.24294753

19/11/2008 289.25 1998.02

0.154691 -0.0257553

19/12/2008 321 2141.1

0.109767 0.071610895

19/01/2009 332.5 2061.15

0.035826 -0.037340619

19/02/2009 336.75 2019.72

0.012782 -0.020100429

19/03/2009 308.5 1931.04

-0.08389 -0.043907076

19/04/2009 311.5 2096.6

0.009724 0.085736184

19/05/2009 346 2285.23

0.110754 0.089969474

19/06/2009 317.25 2211.91

-0.08309 -0.032084298

19/07/2009 316 2239.52

-0.00394 0.012482425

19/08/2009 313.2 2405.57

-0.00886 0.074145353

19/09/2009 335.1 2658.01

0.069923 0.104939786

19/10/2009 330.1 2715.26

-0.01492 0.02153867

19/11/2009 331.9 2695.15

0.005453 -0.007406289

19/12/2009 316 2653.36

-0.04791 -0.01550563

19/01/2010 339.5 2815.68

0.074367 0.061175265

19/02/2010 333.4 2741.54

-0.01797 -0.026331117

19/03/2010 333.1 2891.94

-0.0009 0.054859677

19/04/2010 344.8 2940.74

0.035125 0.016874486

19/05/2010 323 2662.27

-0.06323 -0.094693853

19/06/2010 331.7 2711.62

0.026935 0.018536813

19/07/2010 346.4 2658.05

0.044317 -0.019755718

19/08/2010 356.9 2690.81

0.030312 0.012324825

19/09/2010 385.4 2844.71

0.079854 0.057194674

19/10/2010 383.1 2947.99

-0.00597 0.036305985

19/11/2010 366.8 2959.82

-0.04255 0.004012904

19/12/2010 372.1 3044.15

0.014449 0.028491597

19/01/2011 380.8 3103.83

0.023381 0.019604816

19/02/2011 384 3154.1

0.008403 0.016196119

19/03/2011 351 2973.64

-0.08594 -0.057214419

APPENDIX 1.3b

REGRESSIONANALYSIS

SUMMARY OUTPUT

Regression Statistics Multiple R 0.393155 R Square 0.154571 Adjusted R Square 0.151625 Standard Error 0.07044 Observations 289

ANOVA

df SS MS F Significance

F Regression 1 0.260358339 0.260358 52.47244 4.03E-12 Residual 287 1.424039673 0.004962

Total 288 1.684398012

Coefficients Standard

Error t Stat P-value Lower 95% Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.001231 0.004166711 0.295457 0.767858 -0.00697 0.009432 -0.00697 0.009432

X Variable 1 0.618599 0.085397227 7.243787 4.03E-12 0.450515 0.786684 0.450515 0.786684

Calculation: cost of equity, ke

CAPM Rf (given) equity beta Mkt risk premium equity beta x Mkt risk premium

4.20% 0.618599293 0.0546

0.033776

ke 7.58%

Share Price 19th 2011 Issued Shares

3.51 1872millions

Market value of ordinary shares: 351x1872 million = 6570.72 million

Net financial obligation

= 2215 million

APPENDIX 2.1

COMMON SIZE AND TREND ANALYSIS FOR SAINSBURYS IN PERCENTAGE

2008 2008 2009 2009 2010 2010 2011 2011

m m m m m m m m

Operating Income

Revenue

100

106.0212

111.9247

118.3046

Cost of sales -0.94 -94.52 -94.5802 -94.5029

Administrative Expenses -0.03 -0.97 -2.22 -96.7426 -2.00 -96.5788 -1.98 -96.479

Operating Income from Sales (before tax)

99.03

3.257363

3.42

3.52

Tax on Ordinary Activities -0.01 -0.94 -0.74 -0.89

Tax on Other Income 0.00 0.08 0.04 0.14

Tax on Financial Items 0.00 -0.14 -0.16 -0.11

Total Operating Tax

-0.01

-0.99

-0.86

-0.85

Operating Income from Sales (After tax) 0.02

-0.01

0.00

0.00

Other Operating Income (before tax)

Other Income 0.00 0.30 0.14 0.51

Less: Tax 0.00 -0.08 -0.04 -0.14 Share of Post-Tax loss from Joint Ventures 0.00 -0.59 0.69 0.28

Other Operating Income (After tax)

0.00

-0.37

0.79

0.65

Dirty Surplus Items of Operating Activities

Actuarial gains on defined benefit pension schemes

0.03

-4.77

-0.87

0.14

Less Tax impact on above item

-0.01

1.34

0.24

-0.01

Operating Income 0.04 -3.81 0.16 0.77

Less: Financing expense (income):

Finance expense -0.01 -0.78 -0.74 -0.54971

Finance Income 0.00 0.27 0.17 0.15

0.00 -0.51 -0.58 -0.40

Less: Tax benefit 0.00 0.14 0.16 0.11

0.00 -0.36 -0.41 -0.29 Dirty Surplus Items of Financial Activities:

Available-for-sale financial assets: Group 0.00 -0.08 0.22 0.07 Available-for-sale financial assets: Joint ventures 0.00 - 0.12 0.01

Cash flow hedge: Group 0.00 0.05 -0.02 -0.04

Cash flow hedge: Joint Venture 0.00 -0.17 - 0.01

Share based payment 0.00 - - - Less: Tax on the above components

of other comprehensive income 0.00 0.00 0.02 -0.5 -0.06 -0.15 -0.01 -0.25

Comprehensive Income to Ordinary Shareholders

0.04

-2.1

2.57

3.19

0.04

-2.1

2.57

3.19

APPENDIX 2.2a

SAINSBURYS REFORMATED INCOME STATEMENT FOR THE PERIODS 2008 2011

2008 2008 2009 2009 2010 2010 2011 2011

m m m m m m m m

Operating Income

Revenue

17837

18911

19964

21102

Cost of sales -16835 -17875 -18882 -19942

Administrative Expenses -502 -17337 -420 -18295 -399 -19281 -417 -20359


500

616

683

743

Tax on Ordinary Activities -150 -177 -148 -187

Tax on Other Income 9 16.074 7.56 30.24

Tax on Financial Items -14.7 -27.072 -32.2 -23.52

Total Operating Tax

-155.7

-187.998

-172.64

-180.28


428.002

510.36

562.72


Other Income 30 57 27 108

Less: Tax -9 -16.074 -7.56 -30.24

Share of Post-Tax loss from Joint Ventures -2 -111 138 60


19

-70.074

157.44

137.76



542

-903

-173

29


-151

253

48

-3

Operating Income 754.3 -292.072 542.8 726.48


Finance expense -132 -148 -148 -116

Finance Income 83 52 33 32

-49 -96 -115 -84

Less: Tax benefit 14.7 27.072 32.2 23.52

-34.3 -68.928 -82.8 -60.48

Dirty Surplus Items of Financial Activities:

Available-for-sale financial assets: Group -31 -16 43 14

Available-for-sale financial assets: Joint ventures 48 - 24 2

Cash flow hedge: Group 2 9 -3 -8

Cash flow hedge: Joint Venture -58 -32 - 2

Share based payment -10 - - - Less: Tax on the above components of other comprehensive income -1 -84.3 4 -103.928 -11 -29.8 -3 -53.48

Total Comprehensive Income(to Ordinary Shareholders) 670

-396

513

673

670

-396

513

673

APPENDIX 2.2b

TESCO'S REFORMATED INCOME STATEMENT FOR THE PERIODS 2008 2011

2008 2008 2009 2009 2010 2010 2011 2011

m m m m m m m m

Operating Income

Revenue

47298

54327

56910

60931

Cost of sales -43668 -50109 -52303 -55871

Administrative Expenses -1027 -1248 -1527 -1676

-44695 -51357 -53830 -57547


2603

2970

3080

3384

Tax on Ordinary Activities -673 -788 -840 -864

Tax on Other Income 56.4 66.55 105.56 119.56

Tax on Financial Items -18.9 -

102.08 -87.92 -93.24

Total Operating Tax

-635.5

-823.53

-822.36

-837.68


2146.47

2257.6

2546.32


Profit arising from Property-related items 188 236 377 427

Less: Tax -56.4 -66.55 -105.56 -119.6

Loss from operating activities

Share of post-tax profits of joint ventures and associates 75 110 33 57

Other Operating Income (After tax) 206.6 279.45 304.44 364.44

Dirty Surplus Items of Operating activities

Foreign currency translation differences 38 -275 343 -344

Total gain/Loss on defined benefit pension scheme 187 -629 -322 595

Tax relating to Components of other C.Income

54 -153

Tax on item taken directly to equity 123 435

Total Other operating Income

554.6

-189.55

379.44

462.44

Operating Income

2522.1

1956.92

2637.1

3008.76

Less: Financial Expense

Finance cost -250 -478 -579 -483

Finance Income 187 116 265 150

-63 -362 -314 -333

Less: Tax 18.9 -44.1 102.08 -259.92 87.92 -226.08 93.24 -239.76

Dirty Surplus Items of Financing activities

Change/Loss on revaluation of available-for-sale investments -4 3 1 2

Reclassified and reported in Group Income Statement -29 -334 5 8

Fair value Movements of Cash flow hedges 66 33 505 174 -168 -162 -22 -12

Total Comprehensive Income

2511

1871

2249

2757

Minority Interest

-11

-1

-27

-11

Comprehensive Income to ordinary shareholders 2500

1870

2222

2746

APPENDIX 2.3a

SAINSBURYS REFORMULATED GROUP BALANCE SHEET FOR THE PERIOD 2009-2012

2008 2008 2009 2009

2010 2010

2011 2011

m m m m

m m

m m

Operating Assets (OA)

Property Plant and Machinery

7424 7821

8203

8784

Intangible Assets

165 160

144

151

Investment in Joint Venture

148 288

449

502

Other Receivables

55 45

36

36

Retirement Benefit Assets

495 -

-

-

Inventories

681 689

702

812

Non-current assets held for sale

112 21

56

13

Trade and Other Receivables

206 195

215

343

Cash and cash equivalents

719 10005 627 9846

837 10642

501 11142

Less: Operating Liabilities (OL)

Trade and other payables

2280 2488

2466

2597

Current Provisions

10 19

13

11

Non-current Provisions

63 57

66

62

Taxes Payable

191 202

200

201

Other Payables

89 92

106

120

Deferred income tax liability

321 95

144

172

Retirement benefit obligation

- 2954 309 3262

421 3416

340 3503

Net Operating Assets(NOA)

7051

6584

7226

7639

Financial Assets (FA)

Available for Sales

106 97

150

176

Non-current derivative financial instruments - 31

20

29

Current derivative financial instruments 4 59

43

52

110 187

213

257

7161

6771

7439

7896

Less: Financial Obligations (FO)

Current Derivatives Financial Instrument liabilities 6 56

41

59

Non-Current Derivatives Financial Instrument liabilities 18 8

2

-

Borrowings: amount falling due within 1 year 118 154

73

74 Borrowings: amount falling due after more than 1 year 2084 2226 2177 2395

2357 2473

2339 2472

Net Financial Obligations (NFO)

2116

2208

2260

2215

Non- Controlling Interest (NCI)

-

-

-

-

Common Shareholders' Equity (CSE)

4935

4376

4966

5424

APPENDIX 2.3b

TESCO PLC REFORMULATED GROUP BALANCE SHEET

2008 2008

2009 2009 2010 2010

2011 2011

m m

m m m m

m m

Operating Assets (OA)

Goodwill and other Intangible Assets

2336

4027 4177

4338

Property, Plant and Equipment

19787

23152 24203

24398

Investment Property

1112

1539 1731

1863

Investment in Joint Ventures and Associates

305

62 152

316

Other Investments

4

259 863

1108

Deferred tax assets

104

21 38

48

Inventories

2430

2669 2729

3162

Trade and Other Receivables

1311

1798 1888

2314

Current Tax Assets

6

9 6

4

Cash

1542 28937

2112 35648 2062 37849

1785 39336

Less: Operating Liabilities (OL)

Trade and other payables

7277

8522 9442

10484

Customer Deposits

4538 4357

5074

Current Tax liabilities

455

362 472

432

Non-current Provision

23

67 172

113

Current Provision

4

10 39

64

Post-employment benefit Obligation

838

1494 1840

1356

Deferred tax Liabilities

802

696 795

1094

Other non-current payables

42

68 -

-

Deposits by banks

9441

24 15781 30 17147

36 18653

Net Operating Assets (NOA)

19496

19867

20702

20683

Financial Assets (FA)

Non-Current Derivative Financial Instruments-Assets

216

1478 1250

1139

Current Derivative Financial Instruments-Assets

97

382 224

148

Non-Current Loans and Advances to customers

1470 1844

2127

Current Loans and Advances to customers

1918 2268

2514 Current Loans and Advances to banks and other financial assets

2129 144

404

Short-term Investments

360

1233 1314

1022

Cash and Cash equivalents

246

1397 757

85

Non-current assets classified as held for sale

308 1227

398 10405 373 8174

431 7870

20723

30272

28876

28553

Less: Financial Obligations

Borrowings: amount falling due within 1 year

2084

4059 1529

1386 Borrowings: amount falling due after more than 1 year

5972

12391 11744

9689

Current Derivative Financial Instruments- and other Liabilities

443

525 146

255

Liabilities of the disposal group classified as held for sale

- -

-

Non-Current Derivative Financial Instruments- and other Liabilities 322 8821

302 17277 776 14195

600 11930

Net Financial Obligation (NFO)

11902

12995

14681

16623

Non-Controlling Interests

87

57

85

88

Common Shareholders' Equity (CSE)

11815

12938

14596

16535

APPENDIX 3.1a

SAINSBURY'S REFORMATED CASHFLOW STATEMENT FOR THE PERIODS 2008- 2011

2008 2008

2009 2009

2010 2010

2011 2011

m m

m m

m m

m m

Cash from Operating Activities ( C )

Cash generated from operations

998

1206

1206

1138

Corporation Tax paid

-64

-160

-89

-158

Tax on Interest

-28.2 -92.2 -32.43 -192.43 -26.04 -115.04 -28.89 -186.89

Dividend Received

- 905.8

3 1016.57

2 1092.96

1 952.11

905.8

1016.57

1092.96

952.11

Cash Investments (I)

Acquisition of and investment in Subsidiaries

-7

-10

-

-1

Purchase of PPE

-973

-966

-1036

-1136

Proceeds from disposal of PPE & other Assets

198

390

139

282

Proceeds from Sale of Intangible Asset

-

-

-

-

Purchase of intangible assets

-6

-10

-11

-15

Invested in joint ventures and associates

-31

-291

-2

-2

Cost of disposal of Operations

-1 -820

- -887

- -910

-872

Free Cash Flow C - I

85.8

129.57

182.96

80.11

Financial Flow to Claimants (F)

Interest Paid 123

128

111

126

Interest Received -29

-13

-18

-19

94

115

93

107

Tax On Interest -28.2 65.8 -32.43 82.57 -26.04 66.96 -28.89 78.11

Investment in Financial Assets

-

8

10

50

Repayments of Long-term Borrowing

36

30

74

61

Interest elements of Obligations under Finance Leases payments

3

3

3

4

Repayment of capital element of obligations under finance lease payment

-

-

2

3

Proceeds from Long-term borrowing

-

-152

-235

-45

Proceeds from Short-term borrowing

-

-43

-

-

Repayments of Short-term Borrowing

-

-

36

11

Increase/Decrease in Cash

-164 -59.2

-2 -73.43

235 191.96

-334 -171.89

Total Debt Financing

-59.2

-73.43

191.96

-171.89

Equity Financing (d)

Proceeds from Issuance of ordinary shares

-43

-15

-250

-17

Dividends Paid

178

218

241

269

Capital Redemption

10

-

-

-

Total Equity Financing

145

203

-9

252

Total Financing Flow (F+d)

85.8

129.57

182.96

80.11

APPENDIX 3.1b

TESCO'S REFORMATED CASHFLOW STATEMENT FOR THE PERIODS 2008- 2011

2008 2008

2009 2009

2010 2010

2011 2011

m m

m m

m m

m m

Cash from Operating Activities ( C )

Cash generated from operations

4099

4978

5947

5366

Corporation Tax paid -346

-456

-512

-760

Tax on Interest -84.6 -430.6 -133.104 -589.104 -170.52 -682.52 -136.08 -896.08

Dividend Received

88

69

35

62

Effect of foreign exchange rate changes

-55 3701.4

120 4577.896

49 5348.48

-46 4485.92

3701.4

4577.896

5348.48

4485.92

Cash Investments (I)

Acquisition of Subsidiaries

-169

-1275

-65

-89

Proceeds from sale of joint ventures and associates

-

-

-

-

Proceeds from sale of subsidiary

-

-

-

-

Purchase of PPE and Investment Property

-3442

-4487

-2855

-3178

Proceeds from sale of PPE

1056

994

1820

1906

Proceeds from Sale of Intangible Asset

-

-

4

3

Purchase of intangible assets

-158

-220

-163

-373

Invested in joint ventures and associates -61 -2774

-30 -5018

-4 -1263

-174 -1905

Free Cash Flow C - I

927.4

-440.104

4085.48

2580.92

Financial Flow to Claimants (F)

Increase in loans to joint ventures

36

242

45

219

Decrease in loans to joint ventures

-25

Investments in short-term investments

360

1233

1918

1264

Proceeds from sale of short-term Investments -

-360

-1233

-1314

Interest Paid 410

562

690

614

Interest Received -128

-90

-81

-128

282

472

609

486

Tax On Interest -84.6 197.4 -133.104 338.896 -170.52 438.48 -136.08 349.92

Increase in borrowings

-9333

-7387

-862

-2175

Repayments of Borrowing

7593

2733

3601

4153

New Finance Leases

-119

-

-

-

Repayments of Obligations under Finance Leases

32

18

41

42

Increase/Decrease in Cash

746 -487.6

1721 -1461.104

-690 3258.48

-949 1564.92

Total Debt Financing

-487.6

-1461.104

3258.48

1564.92

Equity Financing (d)

Ordinary shares issued for cash

-138

-130

-167

-98

Proceeds from sale of ordinary share capital to minority interests

-16

-

-

-

Dividends Paid

792

883

968

1081

Dividends Paid to Minority Interest

2

3

2

2

Own Shares Purchased

775

265

24

31

Other Adjustments

-

-

-

-

Total Equity Financing

1415

1021

827

1016

Total Financing Flow (F+d)

927.4

-440.104

4085.48

2580.92

APPENDIX 3.2a

ANALYST FORECAST AND MY PREDICTIONS

RBS Evolution Security PLC Santander

Own Outcome

2012 2012 2012 2012 2012 2012 2012 2012

m m

m m

m m m m

Operating Income

Revenue

22540

22085

22325.6

22007.67

Cost of sales

-21301

-20871

-21098.3 -20797.88

Administrative Expenses

-445.417 -21746.368

-436.425 -21307.3886

-441.18 -21539.52 -434.90 -21232.78


793.63

777.61

786.08

774.89

Tax on Ordinary Activities

-199.743

-195.711

-197.843 -195.03

Tax on Other Income

29.99

29.39

29.71 29.29

Tax on Financial Items

-23.3283

-22.8574

-23.11 -22.78

Total Operating Tax

-193.08

-189.18

-191.24

-188.52

Operating Income from Sales (After tax)

600.55

588.43

594.84

586.37


Other Income

115.3597

113.031

114.2624 112.64

Less: Tax

-29.99

-29.39

-29.71 -29.29 Share of Post-Tax loss from Joint Ventures

64.09

62.79

63.48 62.58


149.45

146.44

148.03 145.93



30.98

30.35

30.68

30.24


8.05

7.89 7.98 7.86

Operating Income

789.04

773.11

781.53

770.40


Finance expense

-123.905

-121.404

-122.73 -120.98

Finance Income

34.18

33.49

33.86 33.37

-89.72

-87.91

-88.87 -87.61

Less: Tax benefit

23.33

22.86

23.11 22.78

-66.40

-65.06

-65.76 -64.83 Dirty Surplus Items of Financial Activities:

Available-for-sale financial assets: Group

14.95

14.65

14.81 14.60

Available-for-sale financial assets: Joint ventures

2.14

2.09

2.12 2.09

Cash flow hedge: Group

-8.55

-8.37

-8.46 -8.34

Cash flow hedge: Joint Venture

2.14

2.09

2.12 2.09

Share based payment

-

-

- -

Less: Tax on the above components of other comprehensive income

2.78 -52.94

2.72 -51.87 2.75 -52.43 -3.13 -57.53

Total Comprehensive Income(to Ordinary Shareholders)

736.10

721.24

729.10

712.88

736.10

721.24

729.10

712.88

APPENDIX 3.2b

SAINSBURYS 2012 ACTUAL OUTCOME

ACTUAL OUTCOMES

2012 2012

m m

Operating Income Revenue

22294

Cost of sales -21083 Administrative Expenses -419 -21502


792

Tax on Ordinary Activities -201 Tax on Other Income 21.32 Tax on Financial Items -26.78 Total Operating Tax

-206.46

Operating Income from Sales (After tax)

585.54


Other Income 82 Less: Tax -21.32 Share of Post-Tax loss from Joint Ventures 28 Other Operating Income (After tax) 88.68



-222

Less Tax impact on above item 68

Operating Income

520.22


Finance expense -138 Finance Income 35

-103

Less: Tax benefit 26.78

-76.22

Dirty Surplus Items of Financial Activities:

Available-for-sale financial assets: Group 1 Available-for-sale financial assets: Joint ventures 2 Cash flow hedge: Group - Cash flow hedge: Joint Venture 2 Share based payment - Less: Tax on the above components of other comprehensive

income 2 -69.22

Total Comprehensive Income(to Ordinary Shareholders)

451

451

APPENDIX 4.1a

Ratio analysis for Sainsbury's:

Ratios (Level 3) 2008 2009 2010 2011

Asset Turnover (ATO) Drivers: PPE Turnover 0.42 0.41 0.41 0.42

Inventory Turnover 0.04 0.04 0.04 0.04

Account Receivable Turnover 0.01 0.01 0.01 0.02

Other Asset Turnover 0.09 0.06 0.08 0.06

Account Payable Turnover 0.13 0.13 0.12 0.12

Other Liabilities Turnover 0.04 0.04 0.05 0.04

1/ATO 0.40 0.35 0.36 0.36

APPENDIX 4.1b

Ratio analysis for TESCO PLC:

Ratios (Level 3) 2008 2009 2010 2011

Asset Turnover (ATO) Drivers:

PPE Turnover 0.42 0.43 0.43 0.40

Inventory Turnover 0.05 0.05 0.05 0.05

Accounts Receivable Turnover 0.03 0.03 0.03 0.04

Other Assets Turnover 0.12 0.26 0.24 0.25

Accounts Payable Turnover 0.15 0.16 0.17 0.17

Other Liability Turnover 0.05 0.14 0.15 0.14

1/ATO 0.41 0.47 0.44 0.42

12 January 2011

Price/Target:

Mkt Cap:

Net Cash/(Debt) (FY1)

390p/350p

7,470m

-2,706m

Sainsburys (SBRY.L) Reduce

What lies beneath

On the surface, headline Q3 LFL sales growth of 3.6% appears attractive. But, the underlying figures are much less impressive, reflect the industry slowdown and suggest that momentum is slowing. Most noticeably, the substantial extension program and last Januarys VAT rise are clouding the underlying trends. Stripping out these impacts, reported 3.6% ex- petrol LFLs would fall to c1.5%, suggesting flattish volumes. With underlying growth unimpressive, margin expansion limited and the industry outlook deteriorating, we see no reason why Sainsburys should command a 20% 2012 PE premium to the sector. We urge caution and rate the stock a Reduce with a 350p target price.

Results: Sainsburys delivered total sales growth of +7.5% slightly shy of our +8% estimate. Excluding petrol, total sales growth of 6.0% was also a touch behind our 6.5% forecast. LFLs of +3.6% were broadly in line. Although 3.6% headline growth appears higher than Morrisons 1%, we note that on the same definition, the growth rates are broadly similar.

Extension impact: With over 300k sq ft of extensions in this quarter (550k year to date), the underlying LFL picture is clouded by the inclusion of this additional space in LFLs. Sainsburys explained this extra space contributed c1% to growth. Last quarter extensions contributed 0.3% to LFL sales and going forward the impact will be even greater than the c1% reported today.

Industry outlook: Management were unequivocal in explaining the pervasive impact of inflation and on their concerns for the consumer outlook. They echoed Kantar in talking about a boost to non-food sales over Christmas as consumers moved away from the High Street due to accessibility and the adverse weather. This shift could cloud the underlying picture and see January sales disappoint as consumers revert back to the High Street.

Valuation: With industry concerns mounting and growth rates weaker than management suggest, Sainsburys 20% 2012 PE premium cannot be justified on fundamentals. We do not expect corporate activity to emerge and consequently, the balance of risk lies firmly to the downside. Reduce, 350p target price.

Year End Mar Sales (m) EBITDA (m) EVO PBT (m) EPS (p) DPS (p) Growth PBT (%) Growth EPS (%) P/E (x) EV/Sales (x) EV/EBITDA (x) Yield (%)

2008A 17,837 1,016 434 16.0 12.0 +28% +32% 24.4x 0.5x 9.0x 3.1%

2009A 18,911 1,084 519 20.5 13.2 +20% +28% 19.1x 0.5x 8.6x 3.4%

2010A 19,964 1,150 610 23.3 14.2 +18% +14% 16.8x 0.5x 8.4x 3.6%

2011E 21,047 1,263 654 25.1 15.3 +7% +8% 15.5x 0.5x 8.1x 3.9%

2012E 22,085 1,359 727 27.0 16.6 +11% +8% 14.4x 0.5x 7.8x 4.2%

Mar

PBT

EPS (p)

DPS (p)

P/E (x)

2010A

610

23.3

14.2

16.8x

2011E

654

25.1

15.3

15.5x

2012E

727

27.0

16.6

14.4x

600 550 500 450 400 350 300 250 200 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11

Price Price Relative to FTSE 100 Source: FactSet Estimates

Dave McCarthy

+44 (0)20 7071 4715 [email protected]

Andrew Porteous

+44 (0)20 7071 4441 [email protected]

EVO Securities makes markets in Sainsburys This publication was produced by Evolution Securities Limited (ESL). This publication is disseminated in the EEA by ESL. This publication is disseminated in the US by Evolution Securities US (ESUS); it has not been altered in any way by ESUS prior to distribution. ESUS is a wholly owned subsidiary of ESL. Under the Markets in Financial Instruments Directive and the Financial Services Authoritys Conduct of Business Rules, this document is a marketing communication and has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although it is not subject to any legal requirement prohibiting dealing ahead of the dissemination of investment research, Evolution Securities Ltd upholds this standard through its internal systems and controls.

The company has reviewed a draft of this research note and factual changes have been made

12 January 2011 Produced by: The Royal Bank of Scotland N.V.

Hold Target price

Sainsbury (J)

Good 3Q sales - as expected

Sainsbury reported a good 3Q11 sales performance although this had been expected. The trading and consumer environment is likely to remain challenging in 2011 but we believe that Sainsbury's business model (just like its UK peers), is strong enough to cope and to grow.

3.70 Price 3.90

Equity | United Kingdom | Food & Drug Retailers

Sainsbury has reported 3Q11 sales covering the 14 weeks to January 8 with total sales up by 7.5% or by 6% excluding fuel.

Lfl sales growth inc fuel was +5.4% but ex fuel and inc VAT lfl grew by 3.6%, which compares to our forecast of 4%. We believe that ex VAT (80bp) and adjusting for the extra week of trading in the quarter (30-40bp), lfl ex fuel and ex VAT rose by 2.3-2.4%.

Extensions are likely to have contributed at least 50bp to the lfl sales performance.

New space contributed 2.4% to sales growth (ex fuel) which compares to our 2.5% forecast.

Total Non-Food sales grew at three times the rate of food and we estimate that this means that Non-Food grew sales by c15% and Food by 5%. Seasonal, Clothing, Home, Electrical and entertainment all contributed strongly to the non-food growth rate while at the same time Sainsbury's Online and Convenience businesses 'continued to perform well'.

The outlook statement is as we had expected, with Sainsbury being 'well placed to make continued good progress in 2011' despite the challenging consumer environment.

We like Sainsbury and we are positive on the continued development of its business model and indeed, we forecast FY10-FY13 EPS CAGR of 10% and over the same period, and despite over 3bn of capex forecast by us, we expect after-tax ROIC to increase by 90bp from a lowly 6.8% in FY10 to 7.7% by FY13. Thus, while we forecast annual incremental after-tax returns of 12-13%, our FY13 ROIC is still just close to Sainsbury's cost of capital.

We changed our recommendation on the shares from Buy to Hold in September 2010 as the share price had achieved our 370p price target. One area where our forecasts could be wrong is the in-store EBIT margin, which we currently forecast to rise by 60bp between FY10-FY13 and to put this into context, each incremental 10bp on top of our FY13F in-store EBIT margin is worth on an NPV basis, around 8p per share to our valuation.

With the shares trading on a CY11F PE and EV/EBITDAR of 13.9x and 9.3x respectively, we do not see much, indeed if any, near-term scope for further multiple expansion. these valuations compare to Morrison's trading on 11.0x and 6.4x and Tesco on 11.8x and 8.5x respectively.

The conference call starts at 8.45am.

Analysts

Justin Scarborough +44 20 7678 0748 [email protected]

Mark Irvine-Fortescue +44 20 7678 2602 [email protected]

John Guy +44 20 7678 3665 [email protected]

Kate Heseltine +44 20 7678 9085 [email protected]

250 Bishopsgate, London, EC2M 4AA, United Kingdom

http://research.rbsm.com Important disclosures can be found in the Disclosures Appendix.

Income statement

m Revenue Cost of sales Operating costs EBITDA DDA & Impairment (ex gw) EBITA Goodwill (amort/impaired) EBIT Net interest Associates (pre-tax) Other pre-tax items Reported PTP Taxation Minority interests Other post-tax items Reported net profit Tot normalised items Normalised EBITDA Normalised PTP Normalised net profit

Source: Company data, RBS forecasts

FY09A 18911 -14577 -3250 1084 -468.0 616.2 n/a 616.2 -89.0 15.7 -77.0 465.9 -177.0 0.00 0.00 288.9 -79.0 1084 518.9 367.9

FY10A 19964 -15372 -3442 1150 -479.0 671.0 n/a 671.0 -103.4 18.4 147.0 733.1 -148.3 0.00 0.00 584.8 148.8 1150 610.1 436.0

FY11F 21320 -16484 -3591 1246 -492.7 753.1 n/a 753.1 -99.7 20.7 26.4 700.4 -210.1 0.00 0.00 490.3 21.6 1246 671.1 468.7

FY12F 22540 -17396 -3778 1365 -520.0 845.5 n/a 845.5 -95.3 23.9 28.9 803.1 -240.9 0.00 0.00 562.2 28.2 1365 766.7 533.9

FY13F 23793 -18333 -3989 1471 -548.0 922.7 n/a 922.7 -89.5 27.5 33.7 894.3 -268.3 0.00 0.00 626.0 37.4 1471 848.2 588.6

year to Mar

Balance sheet

m Cash & market secs (1) Other current assets Tangible fixed assets Intang assets (inclgw) Oth non-curr assets Total assets Short term debt (2) Trade &oth current liab Long term debt (3) Oth non-current liab Total liabilities Total equity (incl min) Total liab&sh equity Net debt

Source: Company data, RBS forecasts

FY09A 627.0 964.0 7821 191.0 430.0 10033 210.0 2709 2185 553.0 5657 4376 10033 1768

FY10A 837.0 1016 8203 164.0 640.5 10860 114.0 2679 2359 742.5 5894 4966 10860 1636

FY11F 837.0 1150 8654 151.0 635.0 11427 114.0 2835 2532 757.6 6238 5189 11427 1809

FY12F 837.0 1223 9073 138.0 649.4 11921 114.0 2985 2559 801.1 6459 5462 11921 1836

FY13F 837.0 1298 9467 125.0 648.8 12376 114.0 3139 2530 832.4 6615 5761 12376 1807

year ended Mar

Cash flow statement

m EBITDA Change in working capital Net interest (pd) / rec Taxes paid Other oper cash items Cash flow from ops (1) Capex (2) Disposals/(acquisitions) Other investing cash flow Cash flow from invest (3) Incr / (decr) in equity Incr / (decr) in debt Ordinary dividend paid Preferred dividends (4) Other financing cash flow Cash flow from fin (5) Forex& disc ops (6) Inc/(decr) cash (1+3+5+6) Equity FCF (1+2+4)

sainsbury report final_merged

Documents

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analysis report

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