Morrison Wm. Supermarkets - better a shopper than a shareholder be

Morrison Wm. Supermarkets (MRW.L): Time to see how life is after the fruit’n’veg de-misters, with these interim results, to 2^nd August. As a preface, yesterday saw confirmation that 140 M local convenience stores are being sold for £25m, triggering a loss on disposal of £30m and a contingent lease obligation of £20m. It was announced today that a further 11 supermarkets are to be closed, on top of the 23 announced in March. In the interims, LFL sales (ex-fuel and VAT) were down 2.7%, but on an uptick as the Q2 figure was -2.4%. Turnover was down 5.1%, with pre-tax profits before all the bad bits down 34.7% at £141m. After re-structuring charges the pre-tax profit was down 35.4% at £117m, (of which £96m was property profits offset by £87m of exceptionals), with eps down 35.0% at 3.73p. As previously flagged the full year dividend should be not less than 5p (down 63.4%), with the interim set at 1.5p. A focus on squeezing working capital and selling property helped net debt to come down from £2.34bn to £2.086bn over the six months. The drive to woo back customers continues, but that means that large chunks of cost savings have to be re-cycled into price cuts, not profits, (as seen in operating profit margin falling from 2.67% to 2.0% year-on-year). There is also the concern as to when capex cuts start to result in a backlog of required work to build up. Capex falling from £257m last year to just £139m looks pretty fierce to me. Apart from wooing back customers the broad ambition is confirmed as “to generate £1bn of cost savings and £2bn of free cashflow in the three years to 2016/17”. After this year’s 5p dividend, they are non-committal saying that they will tell us “as appropriate”.

Aldi and Lidl continue to grow, whilst the other majors are not taking all the blows lying down and it is too early for Morrison’s to feel remotely comfortable. There is still much to do before they can declare ‘business as usual’. They have done plenty to help secure the balance sheet and boost cashflow, but the P&L is another matter. They reckon that the second half will be more profitable than the first, but consensus eps for FY2016 of 10.15p look a bit toppy to me. If the analysts are right, then at 170p the shares are on 16.2x, with a 2.9% yield. Back in March, I felt that there was little rush with the stock at 203p, so a share price 16% lower is worth a quick look. Right, done that. If previous margins could be regained then the multiple might look like a recovery rating. However, lower profitability is the new ‘norm’ and so the shares still do not look compelling at these valuations. The lack of medium term clarity on a dividend policy only adds more doubt for income lovers. I still see little reason to get involved just yet. (Neil Cumming^, 10^th September 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower