Financial Review

Financial services - Sainsbury’s Bank

The accounting for Sainsbury’s Bank in the financial year reflects the sale of five per cent shareholding in Sainsbury’s Bank to HBOS plc on 8 February 2007. Until 8 February 2007, Sainsbury’s Bank performance has been fully consolidated into the Group results and contributed £2 million at an operating level. From this date the Group has accounted for its equity share (i.e. 50 per cent) of Sainsbury’s Bank’s post-tax profit, which delivered a break even result in the period up to 24 March 2007. Sainsbury’s Bank expects to deliver a similar small profit in the next financial year as it focuses on investing for future activities.

Underlying net finance costs

Underlying net finance costs decreased by £24 million to £51 million (2006: £75 million), which comprised a £2 million increase in underlying finance costs and a £26 million increase in underlying finance income. The lower net finance costs reflected the £12 million benefit of lower financing rates following the debt restructuring announced on 24 March 2006 as well as a reduction in underlying net debt through cash flow improvements. The increase in return on pension assets offsets the additional interest cost from the pension contribution of £350 million. In the next financial year the Group expects underlying net finance costs to remain broadly level year on year.

Profit on sale of properties

Surplus assets were sold during the year generating a profit on sale of £7 million (2006: £1 million) and cash proceeds of £106 million (2006: £164 million) which was ahead of target. The Group will continue to dispose of surplus assets and expects the proceeds in the next financial year to be around £75 million.

Profit on part disposal of Sainsbury’s Bank

On 8 February 2007, the Group sold five per cent shareholding in Sainsbury’s Bank for £21 million to HBOS plc. This sale generated a profit on disposal of £10 million.

Past service gains on defined benefit schemes

ollowing changes introduced by the Finance Act effective from 6 April 2006, the defined benefit schemes have implemented revised terms to provide members with the option to surrender a greater proportion of their pension for a tax-free cash lump sum payment. Accordingly, the Group revised its assumptions used in calculating the retirement benefit obligations in respect of this and certain minor changes in scheme rules and has recognised £72 million of past service gains in the Group income statement.

Financing fair value movements

Fair value movements for the Group resulted in a £8 million gain (2006: £12 million loss, of which £4 million loss related to Sainsbury’s Bank).

Taxation

The income tax charge was £153 million (2006: £46 million), with an underlying rate of 34.8 per cent (2006: 35.5 per cent) and an effective rate of 32.2 per cent (2006: 44.2 per cent). The underlying rate exceeded the nominal rate of UK corporation tax principally due to the lack of effective tax relief on depreciation of UK retail properties. This disallowable depreciation amounted to £73 million in the financial year and the Group expects it to remain at a similar level in the next financial year. With effect from 1 April 2008 the standard rate of UK corporation tax will reduce from 30 per cent to 28 per cent and as a result will reduce the underlying rate in the financial year ending March 2009.

Underlying basic earnings per share

Underlying basic earnings per share increased by 40.0 per cent from 10.5 pence to 14.7 pence, reflecting the improvement in underlying profit after tax attributable to equity holders, after adjusting for the minority interests at Sainsbury’s Bank.

Dividends

A final dividend of 7.35 pence per share is proposed (2006: 5.85 pence) and will be paid on 20 July 2007 to shareholders on the Register of Members at the close of business on 25 May 2007. The total proposed dividend for the year is therefore up 21.9 per cent to 9.75 pence (2006: 8.00 pence). Underlying dividend cover increased in the year to 1.5 times (2006: 1.3 times). Going forward the Group expects to achieve underlying dividend cover in the range of 1.5 times to 1.75 times.