WM Morrison Supermarkets Plc

WM Morrison Supermarkets Plc (LON: MRW) is a United Kingdom-based Company, which deals in retail supermarket stores and associated activities.

On 11 May 2021, the Company will release its Q1 trading statement.

Rationale for Valuation – Buy at GBX 176.39

• On a trailing 12 months, EV/Sales and EV/EBITDA multiples are currently lower than the Food & Drug Retailing industry multiples.
• The company's debt/equity ratio in the past three years was considerably below the industry median. In FY21, the debt/equity ratio was 0.81x.
• The online sales tripled during the year, while the capacity increased fivefold.
• Both online and wholesale division remained profitable.
• The total full-year dividend increased by 27.1% against FY20.
• The Company had entered FY22 with a strong trading momentum and robust operational gearing.
• From a technical standpoint, 14-day RSI (GBX 41.28) supports an upside potential.

Key Risks

• The market will remain challenging as customers make a fundamental shift towards the online marketplace.
• Change in regulation pertinent to Food Safety and Product Integrity can lead to additional costs.
• The Covid-19 pandemic and Brexit restricted the movement of goods and services, which eventually impacted the cash flows.
• As the company operates worldwide, their financial performance can be dented with fluctuations in the exchange rate and can also lead the company towards legal and regulatory risks.

Financial Highlights (for the 52 weeks ended 31 January 2021 (FY21), as on 11 March 2021)

(Source: Company Website)

• In FY21, the total revenue increased by 0.4% YoY, with an increase in like-for-like sales of 8.6% (excluding fuel and VAT).
• Free cash outflow for FY21 increased to £450 million (FY20: £238 million inflow) because of low profitability, higher stock and lower fuel sales.
• The Board recommended a final ordinary dividend of 5.11 pence, bringing the full-year ordinary dividend of 7.15 and full-year total dividend of 11.15 pence.
• In December 2020, the Company announced a previously deferred H2 FY20 special dividend of 4.00 pence, which was paid in January 2021.

One Year Share Price Chart

 (Source: Refinitiv, Thomson Reuters)

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

Conclusion

On the operational front, the Company would convert 300 McColl’s stores into Morrisons Daily over the span of the next three years. Looking ahead, the Company expects 2022 profit before tax and exceptionals to be higher than the financial year 2021. It also expects a strong free cash flow, with a significant reduction in net debt. Moreover, the net debt/EBITDA for FY22 is expected to be no higher than the FY20 level of 2.4x.

Overall, the Company has shown strong performance with rapid growth in wholesale and online channels and increased market share. Moreover, in January 2021, the Company has paid the deferred special dividend of 4.00 pence per share. The stock made a 52-week low and high of GBX 157.78 and GBX 205.41, respectively.

Based on the factors discussed above, we have given a “BUY” recommendation on WM Morrison Supermarkets Plc at the current market price of GBX 176.39 (as on 27 April 2021 at 11:45 AM GMT) with a lower double-digit upside potential based 14.70x Price/NTM Earnings (approx.) on FY22E Earnings Per Share (approx.). 

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

*Dividend Yield may vary as per the stock price movement.

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