WM Morrison Supermarkets Plc (MRW)

WM Morrison is a United Kingdom-based company engaged in the business of retail supermarket store and associated activities. It is the UK's second largest food & drug retailer by market capitalisation. The company sells its product under its Morrisons brand. Its key competitors are Lenta Ltd, Greggs Plc, J Sainsbury Plc and Tesco.

Recent Developments
On March 13, 2019, Company reported its preliminary full-year results for the period ended on February 03, 2019.

Financial Performance – FY19 (£ mn)

(Source: Company filings, LSE)

Morrison’s total revenue for FY19 rose by 2.7% to £17.7 bn against £17.3 bn reported in FY18. Company's ex-fuel revenue (on a 52-week basis) surged by 5.1%, which is the highest growth which the company has reported since FY10. Total revenue excluding fuel surged by 3.2% to £14.0 bn.

Profit before tax and exceptional items stood at £406 mnand witnessed a growth of 8.6% as compared with 53-week revenue of £374 mn during FY18. As in last year (FY18), the company added a profit of £5 mn in the 53^rd week, so on a 52-week basis profit before tax and exceptional items surged by 10.0%. In FY19, the company again reported stronger performance with the core supermarkets witnessed growth in spite of several challenges like depreciation and start-up costs, as they continue to build stronger and broader Morrison.

Net finance cost before exceptional items declined by 17.8% to £60 mn as compared with £73 mn in FY18. Exceptional items include exceptional pension items of £26 mn as compared with zero exceptional pension items in FY18.

Earnings per share before exceptional items rose to GBX 13.17 as compared to GBX 12.19 in FY18.

Stock Performance – 1 year

Daily price chart as on (March 26, 2019) before the market close, (Source: Thomson Reuters)

At the time of writing, (as on March 26, 2019, at 10:29 AM GMT) shares of WM Morrison were quoting at GBX 225.45, up by 1.70 points or 0.76% against its previous day close. During last one-year shares have registered a 52w high of GBX 268.42 and a 52w low of GBX 198.57 and at the current market price shares were trading 17.26% below its 52w high level and 11.71% above its 52w low level respectively. On a year on year basis stock was up by 10.46%. The stock was carrying a beta of 0.75 reflecting less volatility against the benchmark index.

Valuation

*Note: All estimates have been taken from Thomson Reuters.
 
Conclusion
The company will have to look-out for competition from online marketplace. Though the sales have been steady till now, the operations will have to be evolved in order to keep up with the investors’ expectations. The company is evolving with time and has started focusing on wholesale as well as online business. The company has signed agreements with brick and mortar as well as online retailers like Amazon. Based on above valuation done, we have given a BUY recommendation at the close of GBX 223.75 (as on March 25, 2019) with lower-double digit upside potential based on 8x NTM Peers median P/CF multiple (approx.) on FY20E Cash flow per share.
 

Tesco Plc (TSCO)

Tesco Plc (TSCO) is a UK based company that is into grocery retail business. The company operates worldwide, and the United Kingdom, Ireland, the Czech Republic, Hungary, Poland, Slovakia, Malaysia and Thailand are the major markets. The company is also into retail banking & insurance services. The company serves millions of customers and have more than 6,800 stores globally. Its key peers are J Sainsbury and WM Morrison Supermarkets Plc.

Financial Highlights – H1 FY19 (£ bn)

(Source: Company filings, LSE)

The company reported revenue of £31,734 million for the H1 ending for the Financial Year 2019 as compared to £28,339 million in the H1 financial year 2018. There was an increase of 12 per cent in revenue, due to an increase in sales of UK & ROI segment of the company.

The company’s reported operating profit before exceptional items & amortisation had increased in comparison with the last year mainly due to the inclusion of Booker profit of £97 million in the H1 FY2019. The company’s statutory profit before tax increased to £564 million in H1 FY2019 as compared to £553 million in H1 FY2018, up by 2 per cent as compared to the last year.

The company’s Dividend per share was increased by 67 per cent from 1.00p in H1 FY 2018 to 1.67p in H1 FY2019 due to on track delivery of c.2.0x EPS cover in the medium-term.

EBITDA margin of 5 per cent for the H1 financial year 2019 stood marginally higher when compared with last year data. However, the reported margin is equal to an industry median of 5 per cent.At liquidity front, Tesco Plc’s current ratio was lower than the industry median of 0.88, reflecting a lack of sufficient current assets to pay its short-term obligations.

Stock Performance – 1 Year
 
Daily price chart as on (March 26, 2019) before the market close, (Source: Thomson Reuters)

At the current price (as on March 26, 2019, at 10:35 AM GMT), shares were trading at GBX 226.48 and declined by 1.7 points or 0.82% against its previous day close. During last one-year shares have reached a 52w high of GBX 266.80 and a 52w low of GBX 187.05 and at the close shares were trading 12.74% below its 52w high level and 24.46% above its 52w low level, which indicates the stock is trending towards its 52w high level. Also, the stock was trading above its 30-day, 60-day and 200-day simple moving average price (SMA), which again indicates the stock is in an uptrend and can go up further from this level. On a year basis stock has delivered a return of 14.74% and on a year-to-date basis, the stock was up by 22.46% respectively.

Valuation


*Note: All estimates have been taken from Thomson Reuters.
 
Conclusion
The company is giving more emphasis on innovation. The company has relaunched many of its products as a part of to 100 years celebration. It is using a cost-effective measure to operate more effectively. While broad-based challenges can be seen ahead of the group, the current trading levels indicate the stock movement towards 52-week high with support coming from growth drivers like increased revenue mainly because of increased overseas sales and adjusted operating profit. Based on the above valuation done, we have given a BUY recommendation at the closing price of GBX 232.80 (as on March 25, 2019) with lower double-digit upside potential based on 9.1x NTM Industry Average P/CF multiple (approx.) on FY20E Cash Flow Per Share.
 
*Note:The buy recommendation is also valid for the current price as covered in the report as on (26^th March 2019).

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