Morrison (Wm) Supermarkets (MRW) Ordinary 10p
HL comment (20 July 2021)
Apollo Global Management has confirmed it no longer intends to make an individual bid for Morrisons. Instead it's in discussions with the syndicate led by Fortress, to become part of the investment group which has previously made a cash offer. The details of Fortress' existing offer are:
A takeover cash offer for 254p per share. That's about a 42% premium to the closing price on 18 June, and values the company at around £6.3bn. The bid is being led by US private equity firm Fortress, with funding currently backed by the Canada Pension Plan and Koch Real Estate Investments.
Morrison's directors intend to unanimously recommend the offer, but the deal is still subject to shareholder approval. If successful, the deal should complete in the final three months of 2021. Fortress highlighted it had no plans to sell any Morrison stores, and ''will support Morrisons and its employees in executing management's existing strategy''.
The shares were broadly flat following the announcement.
The offer led by Fortress clearly has some terms that impressed Morrison's board.
The substantial premium is almost certainly one. But the board will also be relieved that there are currently no plans to strip Morrison of its assets - which can be what traditionally happens when a private equity firm buys up a public company.
The negative effects of COVID have dented the share price in recent months, which is why some might view it as an attractive takeover target. However, it may also explain the hostility from some major shareholders, and until any deal is binding it's important to focus on the existing long-term investment case.
Skyrocketing online sales are Morrison's biggest opportunity. Last quarter, digital sales (which includes morrisons.com and Morrisons on Amazon) were up 113%. At the last count, capacity was up fivefold. This enormous growth is largely because Morrison's online business is smaller than rivals, which leaves room for more exceptional growth.
The long-term growth lever has been accelerated because the pandemic's acted as a catalyst for the shift to online shopping. Crucially, the online business is now profitable. The question now is if Morrison's can keep a firm grasp on that momentum, or if it left digital investment too late and risks being permanently outshone by bigger rivals.
The picture in the core store business is a little mixed. We're starting to see sales growth slow quite significantly. That's largely because we're lapping earlier stages of the pandemic, but the extent of the slowdown could also be a sign of difficulty. Sales were lacklustre before the crisis.
Morrison's is focussed on a volume-led approach, as it continues to cut prices. This tactic requires a high number of sales, or the already thin margins could suffer. As shopping habits continue to normalise, this could put a tight lid on profits.
With the recent sale of Asda and an all-round uber-competitive environment, it's unlikely pricing pressure is going to ease. We've been encouraged by recent market share gains, and the impressive boost from higher food-on-the-go sales, but we'd like proof Morrison's popularity can be sustained.
The Wholesale business offers an alternative source of revenue, helping cushion some of the blows in general retail. And the group has prudently managed finances - most stores are owned, not leased, helping the balance sheet. In the past this has meant special dividends for shareholders - although no dividend is ever guaranteed and special dividends even less so.
Ultimately, we're impressed by Morrison's progress. Its underdog status means it could offer exciting growth opportunities. The price to earnings ratio has increased to an above-average 17.9, largely because of excitement around the prospect of a buyout. If an attractive deal doesn't happen, it could cause some short-term volatility.
Morrison key facts
- Price/earnings ratio: 17.9
- Ten year average Price/earnings ratio: 14.2
- Prospective dividend yield (next 12 months): 3.5%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
First quarter trading details (11 May 2021)
First quarter like-for-like (LFL) sales, excluding fuel, rose 2.7%, compared to 5.7% this time last year, and 9.0% last quarter. The slowdown partly reflects difficult comparisons, because of previous lockdowns and the start of the pandemic.
The group is on track to deliver underlying pre-tax profit of over £431m for the full year.
Morrison said it plans to ''refresh'' its dividend and capital allocation plans, and will give more details at half year results in September.
Total sales, excluding fuel, rose 3.3%, with 0.5% coming from new space. Performance was boosted by ''successful'' Mother's Day and Easter trading. Food-to-go sales have increased, and Morrison said people are cooking at home more. Morrison decided not to pass on higher commodity and freight costs to customers.
Online sales, which includes morrisons.com and Morrisons on Amazon, rose 113% in the period.
Wholesale contributed 1.1% to group LFLs, which is equivalent to a 21% increase in Wholesale LFL. That reflects the previously announced deal to supply a further 230 McColl's stores, and 25 McColl's stores were converted to Morrisons Daily.
Including fuel sales, group like-for-like (LFL) sales were up 4.7%, which is much better than last year, and up on last quarter's 0.7% growth. Fuel sales are almost back at pre-pandemic levels.
During the quarter, Morrison incurred £27m of Covid-related costs, which was in line with expectations and largely related to staff absence.
Looking ahead to the full year, the group plans to open two new stores, in Kirkby and Chelmsford, plus temporary replacement stores in Camden and Little Clacton. As previously guided, net debt's expected to be no higher than 2.4 times cash profits.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 disclosure for more information.
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