Morning Mumble: Sainsburys Food Deflation and the Piggy in the Middle, Vedanta and Dire(light) (DIA) the belated strategic review (cash needed) + Stands Energy Addition

Good Morning,

Sainsbury’s (SBRY),  Q1 was pretty much as expected and now should be referred to as the 'also ran' in the supermarket sector. Suffering 6 straight quarters of LFL sales declines. Is there actually a price war, or a disruptive element in the discounters that's forcing more competition in the market place? What should perhaps be called a deflationary war on market-share?

Tougher competition isn't aiding Sainsbury's at all, with Waitrose improving (gaining customers from SBRY). The biggest risk is SBRY has been caught in the middle between the perceived decent and the discounters (or wannabe discounters), the piggy in the middle!

On today's results it’s very hard to substantiate a holding in SBRY, where there are simply better performing stocks, and an 'unknown' potential liability in property valuations. If one was to consider the supermarkets to a horse race, SBRY are very slow off the mark (read as react), and although there's woes for the sector they're unlikely to benefit without a strategic change. Morrison's may just be placed correctly for a pricing perception benefit. 

In conducting some research, Asda's (Walmart's) "guaranteed to be 10% cheaper" gimmick is losing interest with the customers. The shoppers prefer everyday low prices (EDLP) more than gimmicks, and shoppers whom were enticed to Asda, Lidl and Aldi are returning "home" to Morrisons (MRW). 

Expect Morrisons, with home delivery roll out starting to reduce their drop in sales and slow the growth of the discounters. More so, looking at Tesco's whose emphasis is back on the customer and EDLP, Asda is likely to suffer as a result of MRW/TSCO's actions. SBRY's is in no man's land and likely to be a casualty without a distinct shift in focus, one that price is not everything but perception of value is. 

Food cycles, mean the deflation at the checkout is likely to slow, and in parts reverse. As an indicator, one often follows Pork for various reasons (and also having to price it most days). Unusually, pork normally appreciates around Chinese New Year (it did not) and more importantly, in June prices start to appreciate, the historic seasonal trend. 

The pork prices, including the pork riblets, semy meaty that all good supermarkets should stock, have remained relatively "flat" since February/March. There has been little appreciation (3-5%) in prices that often occurs around June and July. 

Demand simply is not peaking as expected, and if one considers a longer-term price from 2013/4, with an increase in supply both in the UK and Europe, the prices have been capped out. The supermarket prayers of food inflation won't be for another 6 months at least. It will come, but simply not yet.

Yesterday, VED responded to press speculation about their corporate structure. How VED do this and what the tax implications are is another story. India's retrospective tax obligations are very public (Vodafone and Cairn Energy (CNE). 

The minority protection afforded to holders of 26% or more is circumventable by buying out the businesses, but may create an unwelcome tax liability. Whether the tax liability is better than the potential dividend distribution tax that would be imposed by cashing out Cairn India, is a question for the accountants. 

There's been some debate in the mailbox about the woes of Vedanta (VED). Continuing on from EMC: VED Robbing Peter to pay Paul, VED are stuck between a rock and a hard place, with debt being their biggest hurdle. 

Merging the entities to simplify the structure is challenging but not impossible, however there will be liabilities. The Indian's have realised the risks in holding their stock and being left  out in the cold, the stock slid near as much in Mumbai as it rose on the LSE, yesterday.  However, today, Cairn India took off today, near 12% up, one assumes the Indian market knows more than LSE. Trading up as high as 12%, currently just off 9%. 

VED's recent appreciation in price is unjustified, with a gross debt of $16.7 billion and net debt increasing to $8.5 billion. Mainly as a result of VED increasing their stakes in Vedanta Limited and Cairn India Limited to the tune of $0.8B. A tightly held stock, so expect the irrational price appreciation to continue, at least for the time being. With the change in name of Sesa Sterlite to Vedanta Limited in April, it's only a matter of time before VED as a group become a single entity with operating divisions/companies, rather than "majority interests" in a complex structure. 

No doubt the economic times will update the market before the Indian Market or LSE have an RNS, Vedanta Update & Search Cairn India, which appears faster than the Borg! 

As Leggie rightly points out, one of my favourites, Dialight (DIA). They have come out with a trading update. This "company" was of focus some time back, EMC: DIA January 2014 but the opinion has not changed. Recently Michael Sutsko from Laird Plc was appointed Group Chief Executive. It begs the question why the dividend was paid on the 2nd June! Michael has his work cut out, over to DIA...

In its AGM Trading Update of 15 April 2015, Dialight said that Group revenue growth for the first quarter had exceeded expectations but that we had a number of operational inefficiencies.

However, since April the Group has also experienced a slowdown in the rate of orders in the Lighting segment in both the US and Europe which is likely to result in a shortfall in full year revenue. In consequence, the Board expects that underlying operating profit for 2015 will be significantly below expectations and that the results for the first half will be less than the prior year.

The Board believes that this reduction in orders is linked in part to a slowdown in the oil and gas sector.

In the light of this adverse financial performance, and in conjunction with the previously-announced exercise to develop the Group's production infrastructure and processes, Michael Sutsko, the new Group Chief Executive, is leading a strategic review of the business. This review will focus will on the markets in which the Group currently operates, together with an attendant review of its operations, supply chain, and product development. 

The Board remains convinced of the longer term prospects for the Group and it expects to update the market with the findings of this review in the autumn.

As a consequence the target price of 315 pence is under review. 

Atb Fraser

Thanks Leggie for this: Stans Energy Files Additional Arbitration Claim Against Kyrgyz Republic. Diary date 29th June 2015 to see whether the Stans case is likely to go the distance if the Kyrgyz Republic do not see common-sense.