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Morrison (WM) - Makes it 7 consecutive quarters of LFL growth

George Salmon | 14 September 2017 | A A A
Morrison (WM) - Makes it 7 consecutive quarters of LFL growth

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Morrison (Wm) Supermarkets Ordinary 10p

Sell: 286.65 | Buy: 286.65 | Change 0.00 (0.00%)
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Half year results show like-for-like sales (LFLs) rose 3% over the half, but the rate of growth in Q1 was higher than that seen in the second quarter. The shares fell 4.2% on the news.

The interim dividend rose 5.1% to 1.66p per share.

Our view

CEO David Potts' strategic plans for the group make perfect sense; focus on the consumer, reinvest in pricing and improve the stores' appeal. While he may still describe the group as a work in progress, that progress is becoming increasingly tangible. Customers are coming back and like-for-like sales are now firmly back in positive territory.

His plans don't stop there either. His image of a 'new Morrisons' focuses on capital-light wholesale agreements. Morrisons has recently signed deals to roll out convenience stores on petrol forecourts in partnership with Rontec, supply Amazon Fresh with groceries and revive the Safeway brand through a deal with McColl's. The group is targeting annualised wholesale supply sales in excess of £700m by the end of 2018, and more than £1bn in due course.

With the majority of stores owned rather than leased, the group already has strong cash flows, which help support the dividend. The shares currently offer a prospective yield of 2.5%, and analysts expect the payout to rise over the coming years.

However, potential investors should remember that there are still a few weak spots in the business. Morrisons is lacking a convenience footprint of any scale and its online offering relies on a partnership with Ocado.

Furthermore, conditions in the sector are far from supportive just now. An increasingly price-sensitive customer has led the sector to fierce competition, squeezing margins across the board. With real wages falling, it's difficult to see this trend changing anytime soon.

All in all, we feel that David Potts is steering the ship in the right direction, but the waters ahead still look potentially choppy.

Interim results

Half year revenue of £8.4bn was 4.8% up on last year, with a 13.7% rise in fuel sales and +3% LFL growth more than offsetting the -0.4% impact of disposals and store closures. Excluding fuel, revenue was £6.6bn, up 2.6%.

With margins broadly flat year on year at 2.5%, underlying operating profit rose 3.4% to £214m.

Free cash flow of £352m helped net debt fall to £932m, inside the group's year-end 'sub £1bn' target. With capital expenditure of £450-500m set to be weighted towards H2, and lower disposal proceeds and requirements expected from here, Morrisons says net debt should remain around this level over the rest of the year.

During the half, Morrisons announced a new wholesale supply agreement with McColl's, which will to see the return of the Safeway brand. Morrisons is targeting annualised wholesale supply sales in excess of £700m by the end of 2018, and more than £1bn in due course.

While acknowledging the challenging and highly competitive environment, the group is confident of delivering 'consistent and sustainable growth for its stakeholders'.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.

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