BUSINESS LIVE: Sainsbury's lifted by groceries; Greggs to open 160 sites; Persimmon flags market uncertainty

The owner of South West Water has snapped up debt-laden rival Sutton and East Surrey Water for £380million.

Pennon, which owns South West Water, will pay £89million for Sumisho Osaka Gas Water UK Limited, the parent company of Sutton and East Surrey Water (SES Water), taking on its £291million in debts.

The deal will see Pennon add SES Water’s customer base of over 750,000 and expand its scale further across the South of England.

Chris Beckett, head of equity research at Quilter Cheviot:

‘While headline figures suggest Sainsbury performed incredibly well, under the surface things look a little more uncertain. Crucially, however, for what is a subscale, low margin business, it is being managed well and is doing a good job in what is an incredibly competitive environment.

‘It is fair to say that the supermarket division had a very good Christmas and will cheer sales rising by over 8 percent during the festive period compared to last year. While price rises haven’t been quite as severe as earlier in the year, the business appears to have been able to offset that benefit disappearing by increasing volume growth and claim it has taken market share from competitors. Given it is the first of the retailers to report, we will see if that has truly been the case or if it has simply just been a bumper Christmas all round.

‘The consumer discretionary side of the business is still under pressure, with Argos and its non-food divisions continuing to struggle where consumers are cutting back on non-essential purchases. The worst of the cost of living crisis is behind us so it will be crucial to watch this in 2024 to see if any sort of recovery takes place.

‘For investors, there remains better run businesses with proper scale that allows them to succeed in an ultra-competitive market, such as Tesco. But as a barometer for the Christmas period, Sainsbury’s is indicating it could be a good one all round.’

Greggs is set to open up to 160 new sites this year after a record number of openings in 2023, which helped revenues soar by almost a fifth to £1.8billion.

The group, which opened 220 new shops and closed 75 in 2023, saw like-for-like sales jump 9.4 per cent in the final quarter to 30 December, boosted by demand for its seasonal products such as the Festive Bake.

This brought full-year sales growth to 19.6 per cent and its total store count to 2,473 locations, the high street baker said on Wednesday.

Sainsbury’s enjoyed a 7.4 per cent rise in like-for-like sales during the festive quarter, with premium ranges and promotions boosting the supermarket’s bottom line.

The group said sales were ‘powered’ by Nectar Prices, which it claimed helped shoppers save an average of £16 on an £80 Christmas shop.

Sainsbury’s, which has a near-16 per cent share of Britain’s grocery market, maintained its forecasts for the full year.

Neil Shah, executive director of content and strategy at Edison Group:

‘Sainsbury’s Q3 trading statement reflects a successful performance, maintaining its growth trajectory ahead of the market for the fourth consecutive Christmas season. Notably, Q3 Grocery sales saw an increase of 9.3%, with Christmas Grocery sales rising by 8.6%, underpinned by debut Nectar Price festive savings for customers. The General Merchandise sector reported a marginal decline of 0.6% but showed an uptick of 1.5% when excluding the impact of the Argos closure in the Republic of Ireland. Argos overall performed ahead of competitors, delivering a strong Black Friday but facing challenges during Christmas.

‘Clothing sales struggled, experiencing a dip of 1.7% in Q3, with Christmas figures reflecting a 6% decline. However, the overall retail performance, excluding fuel, registered an impressive 6.5% growth, with like-for-like sales demonstrating a strong 7.4% uptick. CEO Simon Roberts attributes the positive trend to the growing number of customers “choosing to shop at Sainsbury’s”, recognising the brand’s unwavering commitment to value, product innovation, and service excellence.

‘The outlook for the rest of the year remains optimistic. The supermarket is projecting an underlying profit before tax in 2023/24 of £670m to £700m, underpinned by strong Grocery sales offsetting comparatively weaker performances in General Merchandise and Financial Services.’

Star stock-picker Terry Smith has urged investors in his flagship fund to take a ‘longer-term perspective’ after it underperformed for the third year in a row.

Smith’s Fundsmith equity fund rose by 12.4 per cent in 2023 – a return to growth after it slumped by 13.8 per cent in 2022.

But it lagged behind the MSCI World Index benchmark, which rose by 16.8 per cent, Smith revealed in his annual letter to investors. It also underperformed in 2021 and 2022.

But Smith said since its inception in 2010 it has returned nearly 4 per cent per year more than the MSCI.

Pennon Group has acquired the holding company of Sutton and East Surrey (SES) Water for an enterprise value of £380million in a bid to expand its foothold in Southern England.

Pennon also announced a new share issue to raise up to £180million in connection with the deal.

The acquisition comes as the company is making hefty investments to tackle water quality, leakage and pollution issues, amid intense regulatory scrutiny.

‘SES Water is a fantastic fit for Pennon as we further expand our presence in water supply across Southern England, building on our successful similar acquisitions of Bournemouth Water and Bristol Water alongside the adoption of water supply in the Isles of Scilly,’ said Pennon Group CEO Susan Davy.

Sumisho Osaka Gas Water UK, the holding company of SES Water and other ancillary businesses, has a customer base of over 750,000, according to Pennon.

Bond market ‘vigilantes’ could target Britain again if politicians make rash promises of spending splurges or tax cuts in the run-up to the General Election, the world’s biggest asset manager has warned.

Vivek Paul, UK chief investment strategist at Blackrock, raised the spectre of a repeat of the carnage seen in UK gilt prices in the wake of Liz Truss’s disastrous mini-Budget in September 2022.

‘As inflation falls in the UK and we get closer to the general election, political parties may be more tempted to promise looser fiscal policy – the more this occurs, the greater the likelihood of the return of the bond vigilantes,’ Paul told Bloomberg News.

Matt Britzman, equity analyst, Hargreaves Lansdown:

‘A solid final quarter means Greggs can tick off 2023 as a year of real progress. Double-digit growth in like-for-like sales was down to extended opening hours, more delivery options, improving supply chain capacity and a fresh new suite of tasty treats.

‘Festive Bakes and Chocolate Orange Muffins lead the way over Christmas but bears may point to sales growth slowing over the year, and the fourth quarter was the lowest of 2023. That’s largely because Greggs was able to limit price hikes as inflation cooled. Longer-term, that’s a net positive. One of Greggs’ key strengths is offering a lower value treat and keeping that proposition intact is key, especially when consumer incomes are stretched. The most important thing is to see volumes trend higher, and that remains the case.

‘The job’s not done. Expect to see more progress over 2024 as investment continues into the digital offering, delivery partnerships and expanding the store estate.’

Persimmon has warned UK housing market conditions will remain challenging this year, as broader economic woes continue to fuel affordability concerns.

The British housing sector is set for a recovery helped by lower home loan rates, although macro-economic worries have tempered those hopes after a year marked by subdued demand and profit warnings.

‘We anticipate market conditions will remain highly uncertain during 2024, particularly for first-time buyers and with an election likely this year,’ the company said in a full-year trading statement.

The York-based housebuilder said current forward sales – a key industry measure which gauges near-term demand – was up 2 per cent on the prior year at £1.1billion.

The company, whose homes range from studio apartments to five-bedroom houses, said private average selling price for its homes rose about 5 per cent to about 285,770 pounds in 2023.

The FTSE midcap firm said it built 9,922 new homes in 2023, ahead of its previous forecast of 9,500 homes.

Greggs is set to open up to 160 new sites in 2024 after fourth-quarter like-for-like sales jumped 9.4 per cent on the back of demand for seasonal products such as its Festive Bake and Christmas lunch baguette.

The group opened a record 220 new shops and closed 75 shops in 2023, giving a total of 2,473 shops trading at 30 December 2023. 

Greggs said its ‘pipeline of new shop opportunities remains strong’ and it expects to open between 140 and 160 net new shops this year.

Roisin Currie, chief executive, said:

‘2023 was a year of further progress by Greggs.  I am proud of our teams, who did a fantastic job serving more customers as we continue to grow our shop estate and offer greater availability through digital channels and extended trading hours.

‘We enter 2024 with plans to continue to invest in our shops and expand supply chain capacity to deliver the growth strategy, supported by our strong balance sheet.  Our value-for-money offer, and the quality of our freshly prepared food and drink continue to evolve and position us well for further progress in the year ahead.’

Asda’s private equity owners have insisted the supermarket can cope with spiralling borrowing costs on its £4billion debt pile.

TDR Capital, which bought the grocer with the Issa brothers for £6.8billion in 2021, told MPs it was ‘more than comfortable’ with the amount owed.

The Issas – Mohsin and Zuber – last year told the same parliamentary committee that the group faces a £30million rise in debt costs from next month.

Sainsbury’s has maintained full-year profit expectation after Britain’s second biggest supermarket by market share saw a 9.3 per cent jump in third-quarter grocery sales, offsetting a decline in general merchandise and clothing revenues.

The group, which has a 16 per cent share of Britain’s grocery market, trailing only Tesco, posted a 7.4 per cent rise in underlying sales for the key Christmas quarter to 6 January.

This helped offset a 0.6 per cent decline in general merchandise sales and a 1.7 per cent drop in clothing sales.

Consequently, Sainabury’s still expects 2023/24 underlying pretax profit of between £670million and £700million, versus the £690million made in 2022/23.

Simon Roberts, CEO, said:

‘We’ve worked hard to really deliver for our customers this quarter and have grown grocery volumes ahead of the market for the fourth Christmas in a row. More customers are choosing to shop at Sainsbury’s, recognising our determined focus on value, product innovation and service.

‘This was our first Christmas powered by Nectar Prices, helping customers save an average of £16 on an £80 Christmas shop. We delivered our best ever value Christmas roast and customers bought record numbers of pigs in blankets, mince pies and sparkling wine. Taste the Difference sales grew ahead of the market as families treated themselves.’