Morrison’s share price: what to expect from 2018 results
Morrisons is on course to deliver another year of progress as it continues implementing its turnaround strategy. We explain what to watch out for ahead of the annual results.
When is Morrison’s earnings date?
Morrison's will release its annual results on Wednesday 13 March at 7am GMT. The report will cover the financial year to 3 February 2019.
Morrison’s results preview: what does the City expect?
Morrisons is deep into its turnaround strategy to 'fix, rebuild and grow' the business. Morrisons is the fourth largest supermarket in the UK but, like its peers, has struggled to stimulate growth and suffered from the rise of discount chains. In response, Morrisons has been busy overhauling its core grocery business while also finding new avenues of growth to diversify the company.
This has seen Morrisons build a substantial wholesale division supplying chains of convenience stores and other retailers including Amazon, making the most of its unique manufacturing arm that sees the supermarket create over a quarter of its own-label goods. It has been busy adding new products while refreshing stores and adding bolt-on services like key cutting and package collection lockers to broaden appeal. It has been investing in and expanding its online offering. Costs have been cut to improve profitability, and Morrisons has extended its reach beyond the UK.
Although it has remained challenging for the wider retail market, Morrison’s strategy has been delivering. The third quarter (Q3) of the recently ended financial year was the 12th consecutive quarter of Like-for-Like (LfL) sales growth, with its strengthening wholesale division offsetting a slowdown from its core retail business. Morrisons has shed only 0.1% market share over the past two years compared to 0.7% at Tesco, 0.4% at Sainsbury's and 0.5% at Asda (owned by Walmart). Customer satisfaction has been on a consistent upward trajectory. Morrisons.com has expanded to over three quarters of the UK. The supermarket’s £380 million annual statutory pretax profit in the 2017/18 financial year represented a huge improvement from the £792 million loss booked in 2015/16, and that has been largely thanks to cost-cutting and efficiencies as revenue grew by only 4.8% over the same period. Debt has been slashed to well below £1 billion from a peak of £2.8 billion and investors have been rewarded with a progressive dividend sweetened with special payouts, even though shareholder returns remain the supermarket’s fourth priority in terms of capital allocation, demonstrating the strength of its cashflow.
For Morrisons, it’s all about keeping up the momentum and demonstrating its strategy is continuing to work, even if new challenges from the likes of Brexit threaten to derail it.
According to a company-compiled consensus, Morrisons is expected to deliver another year of progress in 2017/18. Analysts anticipate significantly faster LfL growth (excluding fuel) than the previous year, an 8.8% rise in underlying pretax profit, a 7.5% lift to underlying earnings per share (EPS) and a 12.9% rise in dividends (ordinary and specials combined):
Morrison’s annual result expectations
|Morrisons - Key figures||2017/18||2018/19 consensus|
|Underlying pre-tax profit||£374 million||£407 million|
|Underlying Earnings per share||12.19p||13.11p|
|Dividend per share||6.09p||6.68p|
|Surplus capital return per share||4.00p||4.72p|
What to watch out for in Morrison’s annual results
There are a number of guidance figures to watch out for when Morrisons releases its annual results for 2017/18. The supermarket chain has said it expects to deliver 'meaningful and sustainable sales and profit growth' over the coming years but has not provided precise figures.
It is, however, tracking the amount of profit being generated by new growth areas. Its wholesale business, online arm and in-store services (as well as interest) added £4 million worth of net incremental net profit in the first half (H1) of the year (taking the total to £46 million). Morrisons has only set itself a medium-term target to boost this to £75 million to £125 million, but investors will expect an improvement in H2 nonetheless. Investors should also be prepared for that vague range to be narrowed, and whether it will move to the upper-or-lower-end of the current range.
Capital expenditure amounted to £185 million in H1 and spending is forecast to accelerate in the second with the annual budget set at £500 million. It expects to book a charge related to onerous payments of £60 million, depreciation and amortisation charges of £440 million to £450 million and, after issuing a £233 million bond during the year, underlying net finance costs of £60 million to £65 million.
Net debt sat at £929 million at the end of H1 and is expected to 'remain at a low level'. However, that does not rule out a rise.
There is widespread expectation that the supermarket will grow its dividends this year. The ordinary dividend for H1 was raised 11.4% to 1.85p and supplemented by a special payout of 2.0p, taking the total interim dividend to 3.82p – more than double year-on-year (YoY).
Morrisons currently has four priorities for its capital and dividends is the last on the list. Reinvesting sums into the business is the main priority followed by servicing debt and maintaining its credit rating, and then investing in new growth opportunities. Fortunately, Morrisons has been generating enough free cashflow to cover all four and analysts expect the firm to lift both the ordinary and special payout when it releases its annual results. Investors should be wary, however, that the dividend would be the first to go if the firm begins to struggle. Free cashflow was £242 million in H1, taking the total to £2.9 billion since the start of the 2014/15 financial year. That has been complimented by £1.005 billion worth of disposals and there is a chance Morrisons could announce it has hit its £1.1 billion target, although progress this year has been slow with just £4 million of sales booked in H1.
Morrisons stores and LfL growth
LfL growth (excluding fuel) is a key measure for Morrisons. So far, it has delivered a YoY improvement in each of the first three quarters of the financial year. Sales rose 3.6%, 6.3% and 5.6% in the first, second and third quarters, respectively, compared to 3.4%, 2.6% and 2.5% the year before. Many will expect Morrisons to report a YoY improvement from the 2.8% LfL growth delivered in Q4 of the 2017/18 financial year. LfL growth did ease in Q3 compared to Q2, however, when it benefited from the one-off boost from favourable weather and the World Cup to report its highest quarterly growth figure in nine years.
In its latest trading update covering the nine weeks to 6 January (and the all-important Christmas trading period), Morrisons said LfL sales growth rose 3.6% YoY but did note there was a 'change in consumer behaviour during the period'.
Interestingly, LfL growth in the recently-ended financial year has been largely driven by its wholesale division, whereas it was being driven by its core retail division the year before.
Morrisons is continuing to refurbish its stores under its 'Fresh Look programme'. It had said the programme was 'virtually complete' when it released its Q3 results, suggesting it should be actually completed by now. The supermarket also opened three new stores during the year and has said its slow-but-steady expansion should translate into net new space sales of 0.2% to 0.3% in the 2018/19 financial year. Investors should also watch out for any further roll-out of new store concepts: at the end of H1 it had introduced 120 new Nutmeg womenswear departments (taking the total to 250) and 45 new Home & Leisure sections.
Morrisons has also been securing reputable partners that can help attract more visitors to its estate. For example, the supermarket had introduced ‘Timpson at Morrisons’ to over 200 stores at the end of H1 and said there was 'many more still to come'. It is also continuing to install Doddle to its stores after introducing it to 240 of them during H1, having already added Amazon lockers across 'almost the entire estate'. Morrisons also said it was utilising excess land by inviting restaurants to set-up shop, leading to an initial deal that saw a McDonald's drive-thru open on one site last August. It had also added 34 Morrisons Daily stores to its own petrol forecourts by the end of H1, as well as services to wash cars, change tyres and foreign exchange facilities.
All of these figures are important parts of Morrison’s strategy and investors will be hoping that progress remains on schedule and on budget.
Morrison’s wholesale and online businesses
As part of its turnaround strategy Morrisons stopped running convenience stores but it has continued to act as a wholesaler. The company has long been a wholesale supplier to Amazon’s food delivery offering and the likes of petrol station forecourts, but the real thrust has come from a deal with convenience chain McColl's.
Morrisons said its wholesale supply partnership with McColl’s had progressed 'more quickly than initially expected' during H1, enough so that it would beat its annual wholesale sales target of £700 million. Having tentatively started supplying just 25 McColl’s in January 2018 it is now supplying over 1300 stores and said at the halfway stage that the last 300 stores would be added 'in due course'.
Morrisons is aiming to generate annual sales of over £1 billion from its wholesale division but has not yet set a deadline to achieve this. However, with better-than-expected progress made this year investors could be given a more precise timeline when the annual results are released.
The supermarket said it was continuing to secure new wholesale customers as it entered the final three months of the financial year and said it would soon be supplying both branded and its own-label products to 1700 stores. Investors should also keep an eye out for news on the supply deals that have been announced but with little detail. It said it had struck a deal with MPK Garages, which owns about 30 petrol forecourts with plans to open more and, more interestingly, a deal to export around 100 own-label items to Big C stores in Thailand.
Morrisons.com is also receiving investment to update its online offering. The service started to benefit from a second distribution centre (owned by Ocado Group in Erith) in Q3, boosting capacity enough for the firm to serve over 75% of British households. It had also introduced its store-pick online service (where online orders are fulfilled by Morrisons stores rather than central fulfilment facilities) in 20 stores by the end of Q3.
Morrisons said the acceleration of the wholesale deal with McColl’s twinned with the investment in the new distribution centre and the online business meant it booked 'some extra start-up costs' in H1 but has said this should reduce in H2. It has also said it will annualise the relaunch of the Home & Leisure range for the first time, allowing investors to track progress, and has said it expects to deliver a better performance YoY.
Morrison’s share price: technical analysis
Morrisons has fallen back since its February high at 245p that found it, however briefly, above the 200-day simple moving average (SMA) of 244p for the first time since November. The downward move from the August highs is intact, although for the time being the price has held above the 50-day SMA (229p). A push below 225p would suggest that the price is headed back to the December lows around 210p, while a close above 245p is required to create a new higher high.
How to trade Morrison’s annual results
A Thomson Reuters poll of 18 analysts shows there is a long-term Hold recommendation (as of 4 March), although it is clear that opinion on the supermarket’s worth is split. Although seven brokers believe Morrisons is adequately valued, eight think the supermarket is undervalued. Recommendations seem to weigh toward the upside, with only three brokers suggesting Morrisons is overvalued.
The overall stance on the stock has become slightly more bullish over the past three months but most changes gravitated toward a Hold rating, with brokers both upgrading and downgrading the stock.
Morrison’s shares: broker recommendations
|Recommendation||Number of brokers|
Morrison’s earnings: another year of progress but outlook is threatened
The supermarket is undergoing huge change and many have turned to M&A to revitalise their business – whether it be the attempt by Sainsbury’s to merge with Asda (having bought Argos), the Tesco-Booker Group merger or the recent Ocado-Marks & Spencer deal. Morrisons, so far, has not followed suit and has remained committed to its turnaround strategy that it has been implementing for years.
Morrisons has delivered tangible results: its grocery business has proven more resilient relative to its peers and its wholesale business has become a real driver of growth (and puts it head-to-head with Booker) to help deliver 12 consecutive quarters of LfL growth. Meanwhile, shareholder returns are on the up, debt is down, and revenue and profit are both on an upward trajectory.
But underlying problems remain. It is still losing market share and competition is only intensifying. Rivals are trying to consolidate. The threat of Brexit is only weeks away, and large sums still need to be invested in new but vital areas, such as online, to ensure it is fit for business. Having set itself on a path of steady growth, the pressure is on to keep up the momentum.
There is a long-term Hold recommendation on Morrisons, although this is weighted to the upside with eight brokers believing the supermarket is undervalued.
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