Morningstar | No Surprises in Morrisons' 2018 Results as Wholesale Leads the Way; Shares Fairly Valued
Wm Morrison reported results for the 52 weeks to Feb. 3, with group sales up 2.7% (3% in our model), like-for-like sales excluding fuel up 4.8% for the year (3.8% for the fourth quarter versus 2.8% a year ago), supported by the retail (up 1.5% versus 1.9% in our model) and wholesale (up 3.3% versus 1.8% in our model) channels, while fuel sales were up 1% (5% in our model), broadly in line with our full-year expectations. Morrison reaffirmed its incremental profit before tax guidance of GBP 75 million-125 million over the medium term with GBP 54 million already delivered. Operating profit before exceptionals was GBP 465 million (GBP 459 million in our model). As we roll our model forward to account for 2018 results, we do not anticipate significant changes in our GBX 208 fair value estimate. We continue to expect intensified competition and margin-dilutive growth in online and wholesale businesses to balance out any meaningful volume/mix gains achieved in the future.Contribution from online through Ocado's customer fulfillment centers was 0.4% in the period, implying 0.2% in-store like-for-like growth and negative store volume, given positive inflation (1.3% according to Kantar).
On the positive side, the full-year total dividend was up 25% to 12.6 pence (6.6 pence ordinary dividend and 6 pence special dividend). Management expects net debt to remain "at a low level" and reiterated its guidance for GBP 1 billion in annualized wholesale sales in the medium term. In online, investments in the new Erith customer fulfillment center (Ocado) and store pick have resulted in Morrisons.com being available to over 75% of households in the U.K. This is in line with the company's capital-light growth strategy.
We are skeptical about two key aspects of the business: (1) the company’s ability to drive profitable volume growth through its supermarkets (negative store volume) and (2) profitability of the company’s few volume growth drivers (wholesale and online).
Our fair value estimate is based on an 8.2% weighted average cost of capital and a Stage II EBI growth rate of 2.0%. We maintain our negative moat trend rating, as we expect continued margin and profitability pressures triggered by stronger competition, the company’s limited channel exposure, and the disruptive growth of hard discounters.
Morrisons (Wm) Supermarkets is engaged in the grocery retailing in the U.K. Through its subsidiaries, Co.'s principal activities include include the acquisition of food products, property management, maintenance and investment, manufacturing and distributing of food products, insurance captive, preparation and supply of seafood, meat processing, manufacturing of morning goods and bread, produce packer and purchaser, grocery retailer and pharmaecutical license holder. As of Jan 29 2017, Co. operated a total of 491 stores, 334 petrol filling stations, 401 cafes and 118 pharmacies.
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