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Poor old Asda. The staff of all grocers are modern legends in the pandemic era. Asda’s sales growth has been less than legendary, though. Unlike its rivals.
Over the quarter to June same-store sales of the UK’s third largest supermarket rose just under 4 per cent, excluding fuel, it said this week. That is half the growth of J Sainsbury in the same period and even further behind Wm Morrison, which announced on Wednesday that Amazon Prime members on the doorstep of Asda’s Leeds HQ can now buy all their groceries from Morrisons and expect same-day delivery. There are plans for the tie-up to be extended.
Non-food sales suffered particularly. Perhaps shoppers preferred not to drive to Asda’s big out-of-town boxes, even after lockdown ended. Online sales did double, but Morrisons’ digital business is still accelerating faster. The Bradford-based group has been altogether quicker witted and more nimble during the crisis.
Asda, owned by Walmart since 1999, has struggled to find its mojo since the UK’s competition authority scuppered its plan to merge with Sainsbury last year. Walmart has put the UK subsidiary back on the block. Private equity groups are circling. A £7bn price has been mooted on the basis that Walmart would keep a minority stake.
But Asda would be a mouthful for a single private equity firm to swallow, even those awash with cash. The price tag — about 10 times the group’s earnings in the year to December 2018 — is conveniently close to the value put on the group during the proposed tie-up with Sainsbury and a little above the £6.7bn price that Walmart paid two decades ago. It is also not far off the value of Asda’s freehold estate.
Buyout firms are no doubt salivating at the prospect of gearing up Asda’s balance sheet, which had nearly £9bn of tangible assets in 2018 and threw off close to £800m in cash, assuming the company’s pension fund trustees give it the nod.
That cannot be a given, though. An exit may not be easy either. There is no big sign above the door. Asda is hemmed in by competition and a trustbuster inimical to consolidation. An initial public offer is possible.
But for all Morrison’s sales growth, its shares are not up much year on year. Sainsbury’s shares are flat. And Tesco’s are no higher than where they were in 2015 when it made a record £6.4bn loss. Investors should deem dividend-paying grocers as heroic as shelf-stackers are to customers. They do not.
Stealth Stakhanovite
Mask maker makes money during coronavirus crisis; shares soar 70 per cent so far this year. Avon Rubber has been one of the top five performing stocks in the FTSE 250 since January. But Avon is no personal protective equipment mask maker — instead, it is the newest entry into Lombard’s Stealth Stakhanovite index of companies that crank out under-the-radar share price growth.
The shares have almost tripled over 14 months. Wednesday’s 5 per cent share price bump off the back of a new Nato contract will hardly garner it headlines.
Despite starting out making tyres, conveyor belts and milking machine tubes back in 1885, Avon has steadily ditched its rubber roots. It struck a deal to sell the last of those businesses — milk — last month.
Avon has recast itself as a niche protection provider to the military and police, fashioning increasingly fancy respirators for the US Department of Defense and other fighting forces. It has churned out organic growth along with adjusted earnings before interest taxes, depreciation and amortisation margins of 20 per cent plus. Analysts’ concerns over its dependence on a single product and a single customer — the M50 and the DoD — have abated as it has upscaled its offering and broadened its customer base. Concerns over the use of chemical weapons in terror attacks have made militaries more willing to shell out.
Management has proved itself adept at M&A too. At £180m, the price for the milking machine sale to Swedish specialist DeLaval was well above what analysts reckoned the cyclical unit was worth. And its acquisition of 3M’s ballistic protection business announced last year is turning out nicely, with new body armour contracts from the DoD.
There is no masking the fact that investors pay a high price for a defence group — 30 times forward earnings while Chemring and Ultra Electronics trade on 18 times. Compare that with peers in the industrial sector though and the valuation is not quite so stretched — Spirax-Sarco and Halma, two other Stakhanovites, trade on 42 times earnings, says S&P Global, thanks to years of predictable growth.
Avon’s boss Paul McDonald, who spent a decade heading up the milk business before taking the top job in 2017, could still make mis-steps. Flush with cash, there is the risk he does one M&A deal too far. No sign of that yet, though. And he is clearly prepared to kill his darlings. Investors should hang on to this one.
Asda: kate.burgess@ft.com
Avon Rubber: cat.rutterpooley@ft.com
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