UBS: Fast Take: UK Food Retailers "Morrisons Q2 (to 26th Apr) LFL +2.2% ..."

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UBS: Fast Take: UK Food Retailers "Morrisons Q2 (to 26th Apr) LFL +2.2% ..."

Valuation Method and Risk Statement

We value Sainsbury's core retail on DCF (WACC 7.3%, terminal g: 1%) and apply a fair value

P/TNAV at 0.3x for Sainsbury's Financial Services. The main risk facing the European grocers is

price war, we believe. The probability of price war rises when major imbalances between

supply and demand exist. Other risks include the growth of non-traditional market players

(e.g. tech platforms) who may have different strategic objectives in the sector; exposure to

currency fluctuations; changes in industry consumption growth (for instance, driven by real

wage growth); and agricultural cost inflation, which the grocers are unable to pass through to

consumers. In addition to its grocery business, Sainsbury’s is also exposed to financial services.

General merchandise also accounts for a higher proportion of sales relative to other UK food

retailers.

We value Tesco using a DCF model. The main risk facing the European grocers is a price war, in

our view. The probability of a price war rises when major imbalances between supply and

demand exist. Consumers' tastes and preferences can also shift. For instance, they may

become more accepting of price focused operators carrying only limited ranges. Other risks

include exposure to currency fluctuations (mainly relating to translation) changes in industry

consumption growth (for instance driven by real wage growth) as well as agricultural cost

inflation which the grocers are unable to pass through to consumers. Regulatory risks are

normally low but there have been instances where regulators act to protect small suppliers,

for instance, by reducing payment terms. Tesco has announced a misstatement of profit in

prior years.