Equity Analysis of Morrison Supermarkets Plc - Essay Example

Morrison’s supermarkets Plc. equity research report This analysis presents a comprehensive overview and detailed evaluation of Morrison Supermarkets Plc. Share price, with particular regard to the recent company’s competitive positioning in a fast changing environment, where the competitive positioning and the price-based positioning can be seen as some of the main elements that affect Morrison’s capacity to maintain adequate profitability levels and generate value for the shareholders as well. A special attention will be dedicated also to the evaluation of share price from one side in light of the core capabilities of Morrison supermarkets from an analytical perspective, and on the other side in light of the macroeconomic conditions in the markets and industry in which the company itself conducts its operational activities. On a company based perspective it’s important to notice that Morrison’s had been founded by William Morrison in 1899, becoming a Public Liability Company only during 1967; the ability to manage supermarkets can be therefore seen also on a vocational perspective, since the family owned company has accumulated the right level of experience in this field. The UK competitive macroeconomic environment is characterized by the presence of large players and by an enduring economic downturn, that has generated much more pressure than in the past on internal policies and strategies of cost reduction and visibility and market presence improvement. Grocery sales in the United Kingdom are dominated by the so called “big four”, the players Tesco, Asda, Sainsburys and Morrisons. These "big four" had a combined market share of around 75 per cent of the UK grocery market at the beginning of 2013: these elements underline Morrison’s successful capability expressed in this market during last decades. The company is also enforcing a challenging presence into the grocery industry through the acquisition of Safeway during 2004, during a time in which M&A operations were seen with favor in this field, although that this specific operation resulted in many profit warnings as well. In terms of timing, the macroeconomic condition presents still challenges that lie ahead, on both monetary and competitive fields, although there is an extended 24 month period ahead during which financing conditions will be positive and the credit crunch experienced during recent months will be overcome. A trend based analysis on the chart of Share Price for Morrison Supermarkets shows the following outcome: Table 1: Morrison Supermarket one year share price Recent evidences during last year show how the share course of MS has been weak, and redundant, especially due to the fact that the company has inherited a less profitable and more competitive grocery market in light of the recent economic crisis, and because of the financial constraints that inhibited consumptions in this sense. The creation of value has been a priority of steering management resources that hasn’t turned into reality in light of recent stock price evolutions. The chart below is much clearer, and denotes how the company’s loss of profitability and competitive positioning is much more evident when we look at MS compared to the FTSE London exchange index (red line). Table 2: Morrison Supermarkets one year share price (blue line) compared to FTSE all share chart (red line) Morrison is underperforming and the prospects are not promising as well in the British supermarket industry as exposed by the Kantar Market share data. The company has been declining in its customer base from 12.3% to 11.7% in the recent year (Ruddick 2012). CEO Dalton Philips justifies these evidences on a market bases perspective through year 2012 by arguing that the decline is sales results is not entirely a deterioration of the company’s performance but instead it is partially related to the strong comparative data of 2011 when Morrison was considered as one of the leading and high performing retailers when assessed on the basis of top and bottom line growth (Ruddick 2012). The CEO further condemns and discourages the use of comparatives for Kantar on a monthly basis. He proposes to have a right vision, a long-term perspective and a plan to be followed. He explains to the shareholders that the right direction is chosen and followed. It needs to be persistently chased until the targets are achieved without duplicating the work or results of others or Kantar. The CEO is highly in favor of the view to be clear on their vision, plans, directions and strategies (Ruddick 2012). The company, according to McKinsey, lacks an adequate profitability level during recent times mainly because of the MS absence in two main fields: The online sales field, with no online sales service at disposal for clients. The absence of its operational activities in new emerging markets (a new possible M&A wave is expected to take place in the following years, and in this sense it’s urgently needed that the company undertakes serious strategy design efforts in this perspective in order to establish a more prominent and diversified market presence also on emerging markets). CEO’s strategic mindset is also an important factor that we are accurately considering for our analysis in this sense: according to a recent speech, Dalton Philips states: “Youre always being very competitive. But for me the most important thing is do we know where we are going? Do we have a roadmap to 2016/2017? We do. Is it the right one? Clearly every chief executive thinks their strategy is the right one. I know ours is the right one. What we have been saying so far has come true” (Ruddick 2012). The adequate presence of a long run strategy, together with a potential improvement within macroeconomic conditions, makes us possible to infer that CEO competitive pressure and analytical reasoning is well founded and documented. The company profile: SWOT analysis and further market based evidences An accurate and comprehensive reasoning on Morrison Supermarkets competitive grade can be properly assessed by looking at the results from a SWOT analysis in this sense, that highlight from one side the internal sources and factors of financial and economic success, also on the basis of analytical factors such as financial indexes, and on the other side relate to the Morrison Supermarket’s competitive positioning into the UK grocery market place: Strengths Family owned company, with secular grocery experience Important net income results during last years Presence in the UK market as a “big four” player Good and adequate business model forecasts Weaknesses Gross margin index of only 6 per cent Return on asset of 7 per cent Declining and deteriorating operational cost levels Opportunities New M&A wave may make possible to enter emerging markets. Business expansion is a concrete opportunity for the company Tax credits are offered within the sector in new emerging countries in order to favor investments in these terms. Threats Online grocery players may retain dominant positions in the future Cash flow volatility Macroeconomic condition and regulatory efforts may limit the UK internal market Industry-based evidences Important evidences in this sense highlights how the recent macroeconomic condition within the UK has stopped its decline and is now at a turning point: the grocery industry has gone through important policies that adequately minimized costs and logistic expenses and unbalances as well. Fiscal incentives and tax credits designed ad hoc by government are creating an economic environment that is facilitating the growth of existing businesses especially in a concentrated market such as the grocery one (ft.com 2013b). The Grocery market itself is a kind of industry in which barriers to entry are high, since important and relevant investments and visibility conditions are required, in addition to the compliance with legal and sanitary regulations as well. These elements, combined with an increased competitive arena, make then possible to understand why during the last decades the UK grocery market has seen the stabilized presence of few large players. Macroeconomic evidences The recent economic turmoil has been a source of declining revenues for corporations in many industries: for what concerns UK, the major market for Morrison Supermarkets, the main evidences show how the worst of the crisis has been overcome, and that major innovative efforts and public incentivized activities and interventions are now emphasizing growth with much more strength. The macroeconomic environment shows therefore signs of optimism, that can be reflected in future economic performances of listed corporations (ERCEG). Therefore, we can infer how the next years can still be years of growth, especially in light of the success of recent austerity policies in northern-Europe countries and especially in the United Kingdom. Business model Morrison Supermarkets is operating in a large and fast changing environment, in which the company’s strategies that aim at minimizing costs have to be balanced with a stress on the major factors that can facilitate increasing revenues on a medium term perspective. These elements have been identified in the following areas: A higher and improved effort toward a better visibility of MS brand, through the design and implementation of ad hoc marketing advertisement efforts A new implemented cost minimization strategy that aims at controlling logistic and operational costs and risks as well. Heterogeneous presence, with further expansions in the online grocery sales sector and in the new emerging oriental economies, on the basis of the model and presence of Tesco in India Improved quality of the service with stress on loyalty programs for the clientele based in the UK. Strategic and economic advice given by the assistance and by the consultancy of major management consultant firms such as Bain and McKinsey, through ad hoc projects in this sense. Presence of large institutional shareholders that can not only retain the right of obtaining dividends, but also the full right of directing and counseling the company’s operational activities and decision making process Supermarket strategy aims at maximizing profits in the medium run by undertaking policies of increased growth on a business oriented basis. Main efforts in this sense are now dedicated to the following factors as well: UK wide market presence New promotions on discounted products to attract consumers Accurate marketing campaign through new channels Recent corporate events Major recent economic events concerning Morrison Supermarkets are highlighted below: During the year 2012, Morrison stepped in the Retail website sector and named it "Morrisons Cellar", trading wine from around the world NUTMEG clothing brand has been launched on a global basis as clothing equipment Morrison further plans to increase the C-store Morrison M from 14 stores to 70+ stores during 2013. New design of whole foods begun at the end of 2012 (including nuts and seeds) M kitchen products design and implementation, with particular stress on the right to balance high quality standards with the delivery of appropriate cheap results for the clientele on an UK market basis. Financial statement analysis Our effort in this sense has been directed on a bi directional basis: from one side we have accurately reviewed how the recent economic and financial statements have evolved for Morrison Supermarkets, and on the other side we have accurately concluded and inferred important take outs for what concerns the future estimations of revenues, costs and net income figures. Here some further justification and important hypothesis concerning our calculus follows: We have considered recent evidences on cost of equity as well, with a broad UK market risk premium individuated in 5.5 per cent, according to recent studies in this sense (Fernandez, Aguirreamalloa and Avendaño, 2013) that in addition to a risk free rate of 1 percent, makes possible to draw the cost of equity at the level of 6.5 per cent. 2013 will be a year of contraction when compared to 2012, mainly due to the negative externalities of the EU debt crisis on UK consumption and GDP data, and due to a deteriorated economic environment. Recent statistics from International Monetary Fund, however, state how already in 2014 an improved growth will take place, overcoming existing challenges, although on a less competitive and more moderate perspective. Cost of sales are estimated on an increased basis, since the raw material and transportation prices are estimated to be increased on the medium term, according to recent evidences from competitors on an European basis. Although 2013 can be considered to certain extents the “annus horribilis” for grocery market due to a reduced consumption level by shareholders, we estimate a moderate but positive revenues increase, since the policies and strategies enacted in this sense require time in order to produce their expected effects, and on a general perspective, growth has also to cope with an increased competition within the grocery market. Past revenue data are highlighted below: Table 3: Revenue from past fiscal years (source: ft.com 2013a) Total debt is increased, and will not decrease during next times, due to the ambitious growth plan highlighted by MS CEO and previously highlighted, that will increase financial expenses as well. These levels are consistent with a financial environment that favors policies of leveraging through debt since interest rates are at all-time low levels and will probably continue to remain at these levels for the next decade according to recent economic evidences. Past levels of debt follow Table 4: Total debt for MS (source Id) Administrative expenses are a cost indicator that in light of its proportion with the total revenues, maintains itself at low levels, mainly due to an improved Morrison Supermarket’s capacity to leverage on its existing human resources in this sense, and by the stabilizing effects of recent management consulting projects enacted on a multi-year basis. Taxation levels are quite moderate, and reflect a corporate friendly environment that is taking place within UK especially for the incentive schemes that have been created ad hoc by government in order to facilitate recovery: we assume that these levels will persist also for the next years due to the governmental willingness to stabilize growth on a more consistent basis. Net income can be an important figure, taking into account also recent tax credits that aim at facilitating economic recovery, and in light also of the previously discussed revenue growth. Recent past gross income figures follow: on a more technical basis we can infer that net income levels that already denote an increased and positive trend in this sense, can continue to follow this pattern on a more consistent basis for the next future. Table 5: Gross income figures for MS (Source Id) Table 6: estimated revenue-costs table for fiscal years 2013 to 2015 Data show how the recent business plan has improved the efficiency of MS operational activity, and retains also the potential of an increased growth in this sense. An accurate review of all cost figures, together with a comprehensive enactment of the recent economic and strategic objectives highlighted by CEO Dalton Philips, make possible to draw optimistic expectations for the future company’s capacity to meet market based challenges and economic based expectations. Both EPS and Dividend data are positive and increasing for the next fiscal years, reflecting a positive outcome of recent challenges in the grocery arena for Morrison Supermarkets. A comparison with peer competitors concerning financial indexes is highlighted below: Table 7: key financial ratios of MS compared to peer competitors (source Id) The company shows a lower than average Price to Earnings ratio, and a low price to book ratio as well. Competitors seem to be much more growth oriented than MS in this sense, and their capability to maintain these levels is based on the same assumptions held by this company (MS). In light of our previous take outs, we can see how the hidden growth potential can be reflected also to improved financial performances and higher expected prices for the future. The P/E ratio that we used show a corporate evaluation of 279 with a price earning of 10 (9.93 is basically speaking rounded to 10) and in light of recent traded price for MS, makes us possible to draw a major NEUTRAL recommendation for the share, due mainly to the fact that the price of recent trades does remain within a band of +/- 20% of our estimated target price. The company’s statements and evaluation effort reflects investor expectations in the medium-term. On the other side the company is awaiting key developments that will impact on the share price. Investors are advised to await the resolution of these key developments APPENDIX (*) BUY: A “buy” rating is applied to companies with established businesses that are profitable and where there is further profit growth expected. A “buy” recommendation means the analyst expects the share to appreciate by 20% or otherwise to reach the share price target on the note. Contrary to our financial advisory competitors, we cannot draw any buy recommendation for this company (**) Risk Warning – The investments are inherently risky and also involve the risk of capital loss. The data relating to securities and investments, as a result, used in the content of this document is not usable for all groups of users and specifically investors. The investment decisions made by anyparty must be backed up by their personal analysis and as per their financial goals. The users of the document, if in any doubt, should seek advice from an investment advisor, financial analyst or a like. Bibliography Ft.com (2013a). WM Morrison Supermarkets P L C Bussiness profile. Retrieved from http://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=MRW:LSE Ft.com (2013b). WM Morrison Supermarkets P L C Summary. Retrieved from http://markets.ft.com/research/Markets/Tearsheets/summary?s=MRW:LSE Research & Markets (2011, August). Wm Morrison Supermarkets Plc - SWOT Analysis - Research and Markets. Retrieved from http://www.researchandmarkets.com/reports/542123/wm_morrison_supermarkets_plc_swot_analysis RUDDICK, G. (2012, December 23). Morrisons chief Dalton Philips outlines plan to survive high street meltdown. [ONLINE] Available at:http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9763714/Morrisons-chief-Dalton-Philips-outlines-plan-to-survive-high-street-meltdown.html. [Accessed 26 March 2013] Dalton, M. A., Deal, J., Ernst, C. T., & Leslie, J. (2002). Success for the new global manager: How to work across distances, countries, and cultures. Jossey-Bass [Imprint]. J.Deal,J.leslie, C.Ernst, M.Dalton (2009). “Success for the New Global Manager. How to Work Across Distances, Countries, and Cultures”. J.Wiley and Sons edition ERCEG, C. (n.d.). Research at the IMF. Retrieved from http://www.imf.org/external/research/index.aspx Research at the IMF. 2013. Research at the IMF. [ONLINE] Available at:http://www.imf.org/external/research/index.aspx. [Accessed 26 March 2013] DEUTSCHE BANK (n.d.). Investor Relations-Ratings. [ONLINE] Available at: https://www.db.com/ir/en/content/ratings.htm. [Accessed 26 March 2013] Fernandez, P, Aguirreamalloa, J and Avendaño, LC(2013). Market Risk Premium Used in 82 Countries in 2012: A Survey with 7,192 Answers. Retrieved from: SSRN: http://ssrn.com/abstract=2084213 Read More