Shopping for Value

LONDON -- Here's a big-cap value play. The most attractive value shares -- by which I mean those with the strongest all-around value numbers, which is all that matters -- are usually small to mid caps, and full "pyad" jobs in particular are rarely seen among big caps. But because I regard a big cap as safer, some value players may be willing to relax the usual criteria they apply.

J Sainsbury (OTC: JSAIY) announced first-quarter trading yesterday, and the price took a bit of a hit. Sounds familiar to Tesco's (OTC: TSCDY) story, right? Well, we'll see. In the meantime, here are some fundies to get us going, based on the latest annual accounts, which fortunately are quite recent -- March 17, 2012. The odd date, by the way, which varies slightly each year, is due to their accounting over 52 weeks rather than the far more common 12 months.

Source: Author's calculation after adding in the property valuation surplus over book.

Let's look at the bad stuff first -- bad in a value sense, that is, though most normal investors, because they lack value sensibilities, wouldn't blink an eye at it.

Tasting bitter
Debt is a clear negative here. Gearing of 36% is modest by big-cap standards, but for value players to whom net cash represents nirvana, it's like those school dinners where you were compelled to eat something that made you retch. (Well, in my day, millennia ago. I understand things are better now.) Debt -- rather, the lack of -- is my second-most important value criterion after assets.

The forward price-to-earnings ratio of 9.5 is not a big value bargain, but it's not outrageously high. A value player might in the present market consider anything over double figures rather painful. But forecast P/E is one of the weaker indicators, subject as it is to all sorts of uncertainties.

Tasting better
So what shines here? Well, no less than what I regard as the king of the value measures: trading below tangible book. Sainsbury's P/TB is only 0.58, and that is deep into value territory, especially for a big cap. Few FTSE 100 types trade below tangible book.

It goes like this. Sainsbury says its property estate is valued at 11.2 billion pounds. This alone weighs handsomely against a market cap of 5.3 billion pounds. Property is valued in the balance sheet at 7.4 billion pounds, so this means that there is a surplus over book of 3.8 billion pounds. With book net tangibles standing at 5.5 billion pounds, it follows that the effective figure of net tangible assets is 9.3 billion pounds, equivalent to about 490 pence per share and giving me the P/TB ratio of 0.58 with the shares at 283 pence.

I should give a bit of a warning here. The property valuation is based on some sort of going concern basis. But my guess is that a closed-down, deserted store in one of those shopping precincts, valued as a piece of vacant retail property, would be worth a lot less than it is as a profitable supermarket open for business. And that may be even more the case in the current depressed times. But on the positive side, Sainsbury is so far below asset value that this is probably not as much of a problem as it appears. Indeed, that could be viewed as a reason why it is trading so much below ostensible asset value.

It is extremely unlikely that Sainsbury would get into such dire straits that it closed a lot of its stores and had to value the properties on a fire-sale basis, however. So there is a strong argument for the going concern basis of valuation.

Then there's the yield. The company has said it intends to increase cover to two. While this may restrict future dividend growth until the cover reaches the new level from the present 1.7, though there's no suggestion of dividend cuts, the forecast 2013 dividend of 16.7 pence makes a forward yield of 5.9%. That is decently into value territory.

Broker views
I'll look at brokers' views. Although they are often of little use in small caps because there may be only one reporting -- and even that opinion may be way out of date -- they are more useful for big caps because there will be a lot of them giving recommendations. But remember: This is value investing. We are looking not for support, but for contra indication. We want them lined up against us.

Looking at all the views I can trace since May 1, there are seven. These are two "buys," four "holds," and a neutral. Without exception, they all have extremely modest price targets -- with, oddly, the neutral giving the highest at 315 pence. This is good. In the broker business, "hold" is frequently code for "sell," but they don't wish to say so. So overall, this is quite negative, and those price targets very weak. Nice -- another positive value feature.

Sainsbury looks an attractive big-cap value play to me. It's not the full works, but it's attractive by the reduced value criteria often typical of big caps, and particularly with the very low P/TB figure, aided by a decent yield to sweeten the wait. Don't forget, as always with value, that you need the patience of a corpse to see it through.

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