Pleasant surprise from Sainsbury's and rebuilding work at Persimmon

“The FTSE 100 nudged up on Wednesday thanks to strength in parts of the banking, food retail and life insurance markets. The main markets in Continental Europe were closed for a public holiday. Investors are waiting patiently for the latest monetary policy decision from the US Federal Reserve which is expected to hold interest rates steady,” says Russ Mould, Investment Director at AJ Bell.

Sainsbury's

“In all fairness, Sainsbury’s results are nowhere near as bad as many people had expected. Despite a backdrop of weak sales flagged by market researcher Kantar and ongoing operational issues with countless examples of stores with empty shelves, the supermarket has delivered full year results ahead of market forecasts.

“Underlying profits and dividends both growing by 7.8% don’t suggest a business in drastic trouble. If you dig deeper it says the performance has been partially helped by Argos and reduced interest costs. The supermarket also credits a solid food performance but there is a sense that the grocery side of its business is still the weakest part of the overall equation.

“If Sainsbury’s can get its grocery proposition back on track, there is hope for it being able to fight back, although the journey won’t be easy.

“We don’t know how it plans to do this as there is no mention of a Plan B following the failed merger with Asda. However, these latest financial results might go some way to explaining why chief executive Mike Coupe wasn’t given the boot when the Asda deal flopped.

“He’s clearly being given time to fine-tune a new plan which we’re likely to hear more about at an investor and analyst event on 25 September.

“There is a lot of positive talk in the results as Coupe tries to reassure the market that he has a grip on the business and is addressing negatives such as store standards. His future with the company will now depend on the execution of this new plan. We will need to see positive results soon otherwise the market won’t be as forgiving as it is today.”

Persimmon

“Today’s update from housebuilder Persimmon doesn’t look great. Part of this is down to a new policy of selling its homes later in the building process so as to offer buyers more certainty on moving-in dates. This has constrained sales in the quarter.

“There are other, larger concerns. Build costs are going up and commentary on a ‘resilient’ market suggests house prices are likely to remain flat at best.

“This chimes with the latest Nationwide survey which suggests house prices were up last month, but by just 0.9% year-on-year.

“The combination of rising costs and stagnant asking prices implies pressure on Persimmon’s margins, something which could be exacerbated by efforts to get its house in order.

“Persimmon needed to make changes after its controversial bonus scheme, coupled with complaints over leasehold terms and build quality led to a threat it might lose its right to sell homes under the lucrative Help to Buy scheme.

“And now a new BBC investigation has revealed houses developed by both Persimmon and its rival Bellway were sold with incorrectly installed or missing fire barriers.

“The response could well include spending more to improve the quality of its homes which could have a further impact on profitability. Though if such action puts the business on a more sustainable footing, it could ultimately be a price worth paying. Shareholders should learn more by the final quarter of 2019.”

These articles are for information purposes only and are not a personal recommendation or advice.