Sainsbury’s Bank joint venture (“JV”)
Sainsbury’s 50 per cent equity share of Sainsbury’s Bank’s post-tax profit amounted to £4 million in the year (2008: £(3) million loss). The underlying banking business has driven increased profitability through a rise in net interest income, strong cost control and tighter risk management which has resulted in a reduced charge for bad debts. Sainsbury’s Bank has imposed tighter lending criteria and attracted more diverse sources of income. It has a strong and well-capitalised balance sheet.
Profits from the Sainsbury’s Bank JV are expected to show a small increase in 2010 as it continues to invest in growth.
Property joint ventures
On 26 March 2008 Sainsbury’s invested £274 million to create a 50:50 JV with British Land. This securitised property JV holds 38 of Sainsbury’s most important stores. The results of the JV have been equity accounted since inception and Sainsbury’s share of underlying post-tax profit in the year is £9 million. The investment has been financed largely by the sale of mature assets with no further development potential, at broadly similar yields.
Sainsbury’s share of underlying post-tax profit of its 50:50 JV with Land Securities, established in November 2007, was £3 million for the year (2008: £1 million profit). One additional property was sold into the JV during the year, bringing the total number of properties within the JV to five.
Profits from both the British Land JV and the Land Securities JV in 2010 are expected to be similar to those recorded in 2009.
Further to the establishment of the British Land JV, Sainsbury’s now accounts for investment properties held within its property JVs at their market value as determined by professional valuers at each reporting date. The difference between the fair value of an investment property at the reporting date and its carrying amount prior to re-measurement is included within the income statement but excluded from underlying profit in order to provide a clear and consistent presentation of the underlying performance of Sainsbury’s ongoing business for shareholders. Any profit or loss on properties sold out of the JVs once developed will be recognised within the income statement but will be excluded from underlying profit.
At 21 March 2009, non-cash investment property fair value movements of £(124) million (at the half-year: £(36) million) have been recognised within the share of post-tax losses from JVs in the income statement, reflecting Sainsbury’s 50 per cent share. These fair value movements are broadly equivalent to a valuation of the properties at an average yield of 6.2 per cent.
Underlying net finance costs
Underlying net finance costs increased by £44 million to £(89) million (2008: £(45) million) which reflects £30 million lower net return on pension schemes and £21 million higher net interest costs due to increased level of average borrowings, partially offset by £7 million higher capitalised interest.
Under IAS 19 ‘Employee Benefits’, there have been significant movements in the pension charges in 2009 compared to 2008. These have resulted in a reduction of £30 million in the net return on pension schemes, of which £19 million is due to an increase in interest on pension liabilities and £11 million is due to a lower rate of return on pension assets. At the level of underlying profit before tax (“UPBT”), the impact of this reduction in net return on pension schemes is mitigated by a £25 million reduction in service costs charged to operating profit. The net impact of these changes was therefore a £5 million reduction in UPBT compared with 2008.
Interest cover, excluding the net return on pension schemes, was 5.8 times (2008: 5.9 times).
Sainsbury’s expects underlying interest costs excluding the net return on pension schemes to reduce by around £25 million in 2010 (from £(113) million in 2009) with lower interest rates on the Group’s inflation-linked debt outweighing the impact of a small increase in average net debt.
|
Underlying net finance costs1 for the 52 weeks to 21 March 2009 |
2009 £m |
2008 £m |
|---|---|---|
| Interest income | 28 | 29 |
| Net return on pension schemes | 24 | 54 |
| Underlying finance income | 52 | 83 |
| Interest costs | (156) | (136) |
| Capitalised interest | 15 | 8 |
| Underlying finance costs | (141) | (128) |
| Net underlying finance costs | (89) | (45) |
| Net underlying interest costs excluding net return on pension schemes | (113) | (99) |
- Finance income/costs pre-financing fair value movements.