Proactive Investors - Asda’s delayed trading update was “sketchy”, in the words of Shore Capital analyst Clive Black, with a focus on adjusted earnings somewhat misleading.
“At a headline level [the results] show progress, especially in debt reduction,” Black noted following the results, which showed earnings up 24% at just over £1 billion and debt of £3.8 billion.
However, depreciation and finance costs matter, he added, with sources suggesting £441 million was spent on the latter over the year.
Asda had claimed it was the UK’s second-largest supermarket, which Black argued “somewhat misses the point” given volume loss and market share erosion.
“Indeed, in the latest NIQ measure, [Asda] was number four behind Aldi,” Black said.
Asda has emerged as a takeover target of shareholder TDR Capital as co-owner Zuber Issa reportedly closes in on selling his 22.5% stake in the supermarket.
As news of the deal is awaited, “we sense that Asda will focus down on what it can control as well as eke out cash to further de-leverage,” Black said.
“Capital expenditure appears very light at the present, which raises questions about the level of investment in maintaining its core supermarket estate.
“How Asda's trading strategy evolves will be of sector interest,” Black continued, “we expect ongoing rationality”.
He added Lidl, M&S, Sainsbury and Tesco (LON:TSCO) had “seemingly better assortments, dynamics, store standards, momentum and balance sheets [...] to defend their market positions”.
J Sainsbury PLC (LON:SBRY) climbed 3.6% on the news, with Marks and Spencer Group PLC (LON:MKS) gaining 3.1% and Tesco PLC 2.4%.