Merryn's Blog

Why Asda's price looks good for Sainsbury's

A financial tidy-up by Asda's parent company, Wal-Mart, values the UK grocer at under £7bn. And that price tag makes Sainsbury's look very cheap indeed.

On the surface, the sale of Asda from one part of US grocery giant Wal-Mart to another is no big deal it's just a financial tidying-up exercise. But investors in the sector should pay attention because the price tag that Wal-Mart has attached to Asda makes one of its rivals look very cheap indeed.

Asda is Britain's number-two supermarket chain. Following the sale, it is now the property of one of Wal-Mart's subsidiaries, rather than the parent company itself. The deal was done for "good financial management" reasons. In other words it must now suit Wal-Mart's book to rearrange its investments, probably for tax purposes.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

The £6.9bn price tag was calculated on a "historic book value" basis, according to Asda. And it's probably fair to guess that it was pretty conservative. As The Telegraph points out, £6.9bn is just £220m more than Wal-Mart shelled out for Asda ten years ago.

But it's not so often that you get told about an 'external', i.e. non-stock market, valuation of such a large, stand-alone business. That makes it pretty handy for comparison purposes.

Advertisement
Advertisement - Article continues below

Let's see. Asda's 2008 annual revenue was £18.6bn. So the transfer was done at a historic price/sales ratio of 0.37 (with this measure, the lower the figure is, the cheaper the company). If you compare this with Tesco (LSE: TSCO) on a p/s multiple of 0.62 and Wm Morrison (LSE: MRW) on 0.52, then £6.9bn appears to be a pretty conservative view of Asda's worth.

But look at the fourth of Britain's big four food retailers (though it's actually vying for second place in turnover terms behind Tesco). That's J Sainsbury (LSE: SBRY), which we tipped this last month.

This is a company currently valued by the stock market at less than a third of last year's sales. So even if the valuation merely moved into line with that Asda price, then Sainsbury's shares would climb from their current 332p a share to 382p. As for book values, Sainsbury's again looks the cheapest on a multiple of just 1.3 times its net asset value, compared with 1.7 for Morrison and 2.5 for Tesco.

Of course, none of this means its shares must go up. But there's been a recent revival of bid talk at upwards of 400p a share and on the grocer's current valuation, it's not hard to see why. It should pay to stick with Sainbury's.

Advertisement

Most Popular

Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/520575/20-predictions-for-the-2020s
Investments

Where will markets be in 2030? Here are 20 forecasts for the 2020s

A lot has changed in the last ten years – stockmarkets soared, technology transformed our lives and politics has changed beyond measure. Here, Dominic…
14 Jan 2020
Visit/520338/how-much-the-state-pension-will-rise-by-this-year
Personal finance

How much the state pension will rise by this year

While Boris Johnson promised to hold a full budget within 100 days of his election victory, many of the details of next year’s state pension increases…
10 Jan 2020
Visit/520553/money-minute-wednesday-15-january
Economy

Money Minute Wednesday 15 January: UK inflation and house prices

In today’s Money Minute, we look ahead to the latest UK inflation and house price figures, plus we have Germany’s GDP data for 2019.
15 Jan 2020