Wm. Morrison: Value Even In Hard Times

The UK retail, or supermarket sector has been under pressure for much of the past year. The sector has been threatened by the rise of discount retailers like Aldi and Lidl. Hedge funds have also swooped in, sensing blood, shorting much of the sector and making great gains. Retailers Tesco PLC ( TSCO) OTCB:TSCDY Wm. Morrison Supermarkets plc ( MRW) OTCMKTS:MRWSY and J Sainsbury plc ( SBRY) OTCMKTS:JSAIY have collapsed 42%, 33% and 29% respectively year to date.

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But as there is blood on the streets, value has emerged. Wm. Morrison, the smallest of the trio has become a value play, thanks to the company’s impressive property portfolio and hefty dividend payout.

Wm. Morrison struggling

There’s no doubt that Wm. Morrison Supermarkets plc ( MRW) OTCMKTS:MRWSY is struggling. Group underlying profit for the six months to August 3 fell 51% to £181m, as the supermarket price war in the UK took its toll. Pre-tax profit fell 30%year-on-year in the period, from £344m to £239m. Like-for-like sales deteriorated by 7.6% during the second quarter.

Management has stated that full-year 2014 profit will be between £325m and £375m, up slightly from the pre-tax loss reported last year of -£176m writedowns are to blame and less than half the pre-tax profit of £880m as reported during 2013. Profits are now coming under pressure as the company spends upto £1bn to slash costs and compete with cheaper peers.

However, for value hunters, Wm. Morrison looks attractive. In addition, there are some signs that things could be starting to turn around for the company.

Hefty dividend

At present levels Wm. Morrison Supermarkets plc ( MRW) OTCMKTS:MRWSY’s shares, which trade in London, support a dividend yield of 7.1% and it appears as if this payout is here to stay. Citigroup has weighed in on this, in a note to clients, the bank stated that:

"We expect the company to generate circa £350m of [annual] free cash flow on average over the coming three years, enough to cover its annual dividend payment of a little over £300m…Even if operating profit undershoots consensus by, say, 10 per cent over the forecast period, we think free cash flow alone can mostly cover dividend."

This aligns with Wm. Morrison Supermarkets plc ( MRW) OTCMKTS:MRWSY’s own management forecasts, which predict that the group is on track to deliver £2bn of cash flow and £1bn of cost savings over the next three years. Management’s £2bn cash flow figure includes £1bn of property sales, which are set to take place over the next few years.

And here’s Morrisons’ most attractive asset; the company has a huge land bank. The value of this land bank at the beginning of August stood at just under £8.5bn, compared to the company’s market capitalization of just over £4.2bn. Including debt and other liabilities, shareholder equity at the beginning of August was reported at £4.7bn, around 12% above the current market value. On a per-share, fully diluted basis, Wm. Morrison’s property is worth 362p per share and book value is 201p per share.

Value to be found

There is value to be found at Wm. Morrison Supermarkets plc ( MRW) OTCMKTS:MRWSY’s. The company is not a cigar butt but it’s defiantly no undiscovered gem either. Sales are continuing to slide, falling 1.3% during the past 12 weeks, according to Kantar. As a result of these declines the company’s share of the UK grocery market fell from 11.1% to 10.9%. Nevertheless, his performance was slightly better than that of Morrisons’ peers, Tesco PLC ( TSCO) and J Sainsbury plc ( SBRY) OTCMKTS:JSAIY’s, which saw sales decline 4.5% and 1.8% respectively during the period. Further, Wm. Morrison’s sales figures have improved marginally since the company began its turnaround strategy.

All in all, Wm. Morrison Supermarkets plc ( MRW) OTCMKTS:MRWSY’s appears to be an attractive, asset backed bet in an unloved sector.

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The post Wm. Morrison: Value Even In Hard Times appeared first on ValueWalk.

-By Rupert H

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