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WM Morrison - Morrison's makeover continues

Nicholas Hyett | 15 September 2016 | A A A
WM Morrison - Morrison's makeover continues

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Morrison (Wm) Supermarkets Ordinary 10p

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In results for the half year to 31 July, Morrison reported underlying earnings per share of 5.04p, up 35%, with the interim dividend up 5.3% to 1.58p. The shares rose 4.5% in early trading.

Like-for-like (LFL) sales are up 1.4% in the first half, excluding fuel (2% in the second quarter, a third consecutive quarter of growth).

Despite a broadly flat turnover, down 0.4% to £8.03bn, underlying profit before tax has improved by 11% to £157m, as the group continue to take cost out of the business. Working capital improved by £318m in the first half, contributing to a two and a half year total of £872m and resulting in a new medium term working capital improvement target of £1bn.

Cost savings were £189m in the half and are now expected to exceed the three year £1bn target by the end of 2016/17. Further efficiency opportunities have been identified going forwards.

Following agreements with Amazon, Timpson and Ocado the group delivered the first £5m of its medium term £50m-£100m non-store profits target from wholesale, services, interest and online.

Free cash flow improved by 16% to £558m, supporting a £477m decline in net debt to £1,269m and resulting in the year-end net debt target being lowered from £1.4bn-1.5bn to £1.2bn.


Despite added uncertainty following the referendum result, particularly around the impact of higher imported food prices if sterling stays at its current low level, the group has seen no negative impact on customer sentiment or customer behaviour.

Our view:

Morrison may still be a work in progress, but that progress looks increasingly rapid. The group are focusing on cash flow and reinvesting again and again into their pricing proposition. 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 is inherently cash generative, since less money is paid out in rents.

There is no sign of an end to deflation in food pricing; Asda recently announced it would be cutting the prices on its own brand essentials by an average of 15%. The fall in sterling after the referendum is an added complication - whether supermarkets will be able to pass the increased price of imported food on to shoppers remains to be seen. But for now debts are falling as the group focuses on cash, and Morrison's financial position looks secure enough.

Commercial income, i.e. volume rebates from suppliers, was £403m in FY16, accounting for all of the group's underlying profit before tax. 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 challenges, not least the absence of a convenience offer of any scale and its under-representation online. On the latter point, the Group have announced plans to further expand their relationship with Ocado and Morrison will also be providing wholesale supplies of produce to the Amazon Pantry service.

The sustained LFL sales growth shows that Morrison can generate sufficient extra sales volumes to offset the ongoing level of price deflation. Customers are coming back to the stores, as evidenced by rising transaction numbers. Finance charges are falling as debts are repaid, and if the positive LFL sales trend can be maintained, then Morrison could be looking at a brighter future. With the improving sales trend backed up by positive news on cash flow and debt repayments, Morrison look to have pulled safely through the worst.

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.