Morrisons' half-year results delivered another disappointing read, concluded Shore Capital, which nevertheless upgraded its share advice from 'sell' to 'hold'.
Morrsions' half-year results divided City opinion
Analysts Darren Shirley and Clive Black said the results, published on Thursday October 12, "as expected, made for disappointing reading".
The retailer posted flat sales year-on-year at £8,938M with modest in-store growth of 0.8% offset by declining fuel sales.
Shirley and Black estimated second quarter like-for-like sales fell by about 1.4%, compared with the 1.8% decline in the first quarter. "With management reporting inflation of about 2.7%, volume declines are implied at 4.3%, a considerable challenge for a business with significant vertical integration," they said.
Operating profits
Based on Morrisons' definitions of operating profits, Shirley and Black calculated the retailer delivered earnings before interest and tax (EBIT) of £408M. That represented a 14.1% fall year-on-year, with the EBIT margin falling by 75% to 4.6%.
As operating profits fell, the group's earnings before interest, tax, depreciation and amortisation (EBITDA) margin fell by about 60% to 6.8%, while operating cash flow fell by 26% to £613M.
Net debt increased to £2.53bn, up £0.85bn year-on-year. Morrisons predicted year end net debt of about £2.7bn.
"Such negative momentum in sales and profitability would typically lead us to reiterate our negative stance on Morrison," said Shirley and Black. But the retailer's decision to cut both capital spending and superstore space openings.
Captial investment was due to fall from £1.2bn in 2013/14 to £850M in 2014/15 and £650M in 2015/16. Superstore space openings were scheduled to fall to 32.5m2 per year from 2015/16.
Shore Capital was also encouraged by Morrisons' pledge to manage its property portfolio more actively. About 90% of the portfolio is freehold and has an estimated market value of £9bn.
Shirley and Black predicted the greater capital discipline and financial impact from potential returns will underpin the shares, leading them to upgrade their advice on the retailer's shares.
'A major swing factor'
City analyst Jefferies identified Morrisons' plan to rationalise space as "a major swing factor". The group was showing "a level of discipline currently absent" in other quarters, said analyst James Grzinic.
"Details [of the property review] will not be forthcoming until the March finals, but the arbitrage between buoyant UK commercial yields and the group's earnings multiple suggests any cash return would be enhancing," said Grzinic, who offered a 'buy' recommendation on Morrisons' stock.
Oriel Securities agree the key to Morrisons' financial statement was its plans to reduce large store openings, and cut the capital expenditure from over £1bn a year to about £650M.
"The consequence of this is that cashflow will be very strong from 2015 onwards, and management has expressed an intention to return surplus capital to shareholders," said Oriel Securities.
The analyst also upgraded its advice from 'sell' to 'hold'.
More details of Morrisons' half-year results are available here.
