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Wm. Morrison - H1 Results. Profits down, cash flow strong

Steve Clayton | 10 September 2015 | A A A
Wm. Morrison - H1 Results. Profits down, cash flow strong

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Morrison (Wm) Supermarkets Ordinary 10p

Sell: 291.90 | Buy: 292.10 | Change -0.10 (-0.03%)
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Interim results from Morrison show a business making big efforts to turn itself around, but still with intense pressure on profitability. Like for like sales dipped 2.4%, excluding fuel in the second quarter, an improvement on -2.9% in the first quarter. The dividend is cut to 1.5p, with a promise of at least 5p for the full year. Beyond that, there is no commitment to any particular level of dividend. Positive cash flow allowed debts to fall £254m since the year end.

Underlying profit before tax fell from £181m to £117m. Morrison continues to reduce capital expenditure, which dropped to £139m (2014/15: £257m) allowing the group to generate free cash flow and pay down debt. New CEO David Potts has built a new executive team, bringing in external appointees to some key roles, whilst almost halving head office senior management numbers.

The group guide simply that second half profitability is still expected to be higher than the first half. The group announced the sale of substantially all of its convenience stores for £25m, plus a further eleven supermarkets are to be closed, whilst retained stores will see a faster programme of renovations. The market responded negatively, opening the stock around 3% down.

Our view:

Morrison is work in progress. The group are focusing on cash flow and reinvesting again and again into their pricing proposition. Cutting the dividend back further frees up cash flow. Last year, pre-dividend the group generated almost £800m of free cash flow, so the scope for paying down the debt is clear. The group is also well on the way to releasing £600m from working capital.

David Potts' strategic plans for the group make eminent sense; focus on the consumer, regain pricing competitiveness and improve the stores' appeal. With the highest percentage of freeholds (85% currently), Morrison has an inherently cash generative model, since less money is paid out in rents.

There is no sign of an end to deflation in food pricing; that will hold back LFL sales, but we see little alternative; Morrison is firmly in the sights of Aldi and Lidl and if it is to repel their threat its value focus must be relentless.

Analysts are likely to trim their profit forecasts for future years, but with debt falling steadily, and limited future capital spending plans, Morrison's financial position looks secure enough. But dividends are not necessarily at the bottom yet. The group's comment about future payments after the current year is noticeably woolly.

Commercial income, i.e. volume rebates from suppliers, is currently accounting for all of the group's underlying profit before tax, running at £179m (2014/15: £194m) in the first half. Clearly, Morrison needs to reach a position where it is making a profit without having to ask its suppliers for rebates.

Morrison has potential; billions of pounds of sales and a large freehold estate, with attractive cash generation qualities. But it still faces many, severe challenges. Earnings are likely to remain depressed for some time yet, and the group is still under-represented online and lacking any effective presence in the convenience channel. But debt is falling and the cash is pouring in, so this is a drama, not a crisis. The only thing assured, is that it will be some time before we know whether Mr Potts can restore Morrison to rude health.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.