WM Morrison Supermarkets PLC (LON: MRW) – UK retail sales surged in April 2021 as stores reopen

WM Morrison Supermarkets PLC (LON: MRW) is a United Kingdom-based Company, which deals in retail supermarket stores and associated activities. MRW is particularly focused on food & grocery. Moreover, it processed and sold most of the fresh food through its own manufacturing facilities. The Company serves around 11 million customers every week, with over 110,000 colleagues across the business. Some of the most prominent brands include Naturally Wonky, Free From, Nutmeg, Home Cook, V Taste and Little Kitchen. MRW is a constituent of the FTSE 250 index.

On 10 June 2021, MRW has scheduled its Annual General Meeting.

Recent trend of dividend payments

(Source: Company results)

MRW will pay a final dividend of 5.11 pence per share for FY21 on 28 June 2021, while the ex-dividend date was 20 May 2021. Moreover, MRW had already paid a special dividend of 4.00 pence per share in December 2020 and an interim dividend of 2.04 pence per share in September 2020, taking FY21 total dividend to 11.15 pence per share. The total FY21 dividend remained around 27.1% higher when compared with 8.77 pence per share of the total dividend paid during FY20. 

Growth Prospects and Risk Assessment

• Recent recovery in fuel sales – The Company had shown substantial recovery in fuel sales, and fuel volumes almost bounced back to pre-pandemic levels during Q1 FY22. Now, the Company had anticipated FY22 net debt/EBITDA to remain lower than the FY20 levels of 2.4x.
• Opening of new stores – MRW plans to open two new stores in Kirkby and Chelmsford and two temporary replacement stores in Camden and Little Clacton during FY22.
• New Supply arrangements - The Company would expect to strengthen the existing supply chain as it had initiated new supply chain arrangements with buying group Unitas, two convenience forecourt retailers- Scotland-based Highland Fuels Ltd and South-West England based Gardner Garages Ltd, and wholesaler Blakemore.
• Fix, Rebuild, Grow, sustain strategy – As a part of the strategy, the Company had recently acquired Falfish, a family-owned wholesaler of sustainably sourced seafood based in Cornwall.
• Major Environmental commitments – MRW had made two significant environmental commitments, i.e., to be supplied by 'net zero'-carbon British farms by 2030 and to remove all plastic bags from the stores during FY22.

(Source: Company presentation)

The dividend yield of MRW remained significantly higher than the corresponding multiple of the Personal Care Drug and Grocery Stores sector, illustrating the Company’s capability to generate higher returns for shareholders as compared to the industry. Moreover, the net debt to equity remained lower when compared to the Personal Care Drug and Grocery Stores sector.

 Key Risks

• Business Interruptions – Significant failure of technology or strategic third-party failure could cause substantial disruptions in the business operations.
• Regulation – As the grocery sector is regulated by GSCOP (Groceries Supply Code of Practice), the breach of regulation could lead to reputational damage.
• Competitive Pressure – The top-line business and bottom-line business may get affected by the failure to deliver products at a competitive price.
• Banking crisis –The banking crisis could lead to a reduction in committed or uncommitted facilities, and it may adversely impact the liquidity of MRW.

Subsequently, we will analyse the Key Fundamental Statistics & Key Shareholders Statistics of WM Morrison Supermarkets PLC.

Silchester International Investors, L.L.P. is the most significant shareholder as it holds nearly 313.53 million shares as of 31 March 2021. 

Q1 FY22 Trading Update (for the 14 weeks ended 09 May 2021, as of 11 May 2021)

(Source: Company result)

• MRW had shown growth of around 2.7% in the total group LFL (like-for-like) ex-fuel sales, while the LFL inc-fuel sales jumped by around 4.7% during the period. Moreover, the total sales inc-fuel went up by 5.3% during the period.
• The LFL fuel sales went up by around 17.5% during Q1 FY22 as compared to Q1 FY21, while the volumes had managed to reach pre-pandemic levels during the period.
• MRW had witnessed a very strong growth of around 21% in the wholesales LFL revenue during Q1 FY22, boosted by the addition of 230 McColl’s stores in the existing supply during recent weeks.
• The online sales had witnessed a year-on-year growth of around 113% during the period. 

Financial Ratios (FY21)

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 24 May 2021, at 09:31 AM GMT, MRW’s shares were trading at GBX 178.35, down by around 0.83% from the previous day closing price. Stock 52-week High and Low were GBX 195.82 and GBX 157.78, respectively.

On the weekly chart, the stock is trading in a symmetrical triangle pattern, and a breakout of the upper band of the pattern may generate a fresh upside movement in the stock. The leading indicator RSI (14-period) is trading at ~45 levels and indicating a sideways to a positive direction. The trend-following indicator 50-period SMA is trading below the current market price and supporting an upward stance.

In the last one year, MRW’s stock price had delivered a positive return of ~2.55%, while the FTSE All-Share Consumer Staples index (benchmark sector) had produced a return of about 5.33%. 

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative) 

Peers used in the valuation methodology (Price/NTM Earnings)

Business Outlook Scenario

MRW had responded well through the pandemic and delivered an encouraging start to FY22 as it had achieved LFL sales growth during Q1 FY22. After delivering an overwhelming quarter, MRW now anticipates significant net debt reduction and substantial profit growth for FY22. Moreover, the Company had also anticipated meaningful profit growth during FY23 as well. Furthermore, MRW had shown accelerated recovery of food-to-go, take-away counters and salad bars, and the popular cafés after the reopening of the economy. With regards to the profitability, MRW had expected FY22 profit before tax and exceptional to remain higher than the £431 million. However, the Company had not achieved the desired profitability during FY21 as it had waived the £230 million business rates relief. Also, MRW had expected net new space sales contribution to be around 0.2% during FY22. Overall, MRW will prepare long-term capital allocation plans from the perspective of achieving long-term business growth.

(Source: Company presentation)

Considering the good UK retail sales data, consistent dividend payments, decent revenue growth during Q1 FY22, boost in online activity, bright outlook, robust profitability, and support from the valuation as done using the above method, we have given a “BUY” recommendation on WM Morrison Supermarkets at the current price of GBX 178.35 (as on 24 May 2021 at 09:31 AM GMT), with lower-double digit upside potential based on 15.27x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*The dividend yield is subject to change as per the stock price movement.

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