Thursday tips round-up: Sainsbury, Tesco, UBM

Competition in the UK groceries market has simply gotten downright vicious, as the disruptive German discounters Aldi and Lidl carve themselves a piece of the market. That is so much so the case that last month the market’s size grew at its slowest since 1993, data from Kantar revealed. However, there are important differences amongst the Big Four which must be taken into account. For one, Sainsbury has only half the square footage of Tesco, which is trying to defend too many out-of-town hypermarkets which are simply excessively large.

Sainsbury however has its own troubles. Net debt stands at just 1.5 times operating earnings. Nevertheless, if one adjusts the numerator for lease commitments, and the denominator for rent costs, then the ratio rises to four. The company is fine with that, but shareholders are not. They know little about the bank covenants Sainsbury has signed up to and therefore fear a rights issue. They need more clarity on that issue, says the Financial Times’ Lex column.

Exhibitions outfit UBM is paying a hefty price for US outfit Advanstar. Upon closer inspection however it is less so, but it remains to be seen whether the investment will finally pan out, or not. The company is to put out $972m for its US rival, or 12 times operating profits.

That will strengthen its footprint in the US market, where 42% of the world’s exhibition industry is located. However, that is a historic figure. On the basis of the 2014 numbers that financial ratio comes in closer to ten. As well, there are several advantages which will accrue to UBM from a tax stand-point. The alternative would have been to build-up its own presence Stateside. On about 12 times’ earnings the stock is on an attractive multiple, “but it is still a gamble on the deal paying off”, says The Times’s Tempus.