6th Feb 2015 10:56
LONDON (Alliance News) - Supermarket chain Wm Morrison Supermarkets is likely to prioritise like-for-like sales over margins in the near term and "very few investors" believe it can expand margins, says Nomura, which reiterates its Buy rating on the stock and target price of 270 pence.
Nomura says one of its competitors has claimed that consensus is already looking for margin recovery between 2015 and 2018, which would recover above Tesco's margin.
"We were surprised to see a competitor claiming last week that consensus already looks for margin recovery of over 80bp over January 2015 to January 2018 ? and moreover that this ?recovered? level would be above Tesco?s margin, even adjusting for Tesco?s higher rents. We agree that it?s reasonable to expect Tesco?s scale to drive a higher margin three to four years out," says Nomura.
"But both statements are simply false, as far as we can tell," adds the Japanese bank.
"The consensus that we see is for flat, low margins at Morrison ?stores?, and we firmly believe there is upside both in earnings before interest and tax and in cash generation over the next three years, just perhaps not two years now," says Nomura.
On January 13, the supermarket said its chief executive would be standing down in March, and said its chairman retired from the company on January 22.
"Outgoing management at Morrison had started a three-year plan which, whilst not carrying explicit margin targets beyond January 2015, we had always interpreted as involving margin recovery in January 2016 and January 2017," says Nomura.
"Margins were down in year one as a result of a pricing ?reset?, but with now some of the keenest prices in the industry and with an already well-known cost opportunity as me-too IT finally unlocked savings in supply chain, there were going to be much bigger upward than downward pressures in years two and three," says Nomura.
The cost catchup coming over 2015 to 2016 is "so overwhelming" that it would be difficult to spend all of it on lower prices ? but Nomura thinks there were clues in new Chairman Andy Higginson?s first address to investors.
"What was outlined last March was a great plan for freeing up resources... For me to invest back in the customer and get trading momentum through the stores. In our game, with high capital, lots of people, thin margins, that is the lifeblood of the business... The truth is, in our game, you can't save your way to prosperity," Nomura cited Higgison.
As a result, Nomura believes margins will not be up between 2015 to 2016, and it cuts its forecast by 15%, "closer to flat year-on-year".
"If the new management is determined to establish pack-beating like-for-likes as soon as possible, by offering a price proposition that we suspect quickly becomes the cheapest in the market - if it is not already - then it is what we must expect for the near term," says Nomura.
Nomura says greater investment in prices this year will be recouped in higher like-for-likes, forecasting a 2% rise in 2017 and 2018, with positive operating leverage.
"Moreover, we think the lower earnings level in the near term and the management change mean the dividend is unlikely to remain at 13.7 pence in January 2016. We now assume that it is cut, to 7.7 pence, or 50% of that year?s earnings level," says Nomura.
Morrison shares were down 1% to 179.33 pence per share on Friday morning.
By Joshua Warner; [email protected]; @JoshAlliance
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