Morrisons – Greenery
All,
Please find our updated analysis here.
Morrisons is seeing further green shoots in its recovery. UK Inflation is falling, if not disappearing, and the cost-of-living crisis is easing for the consumer. Whilst price subsidies will continue to be a margin headwind next year, they will reduce. We forecast EBITDA to grow in 2023.24 as Morrison's higher margin convenience strategy rolls out and the general recovery in the UK economic environment begins to flow through.
Investment Rationale.
We continue to hold our 2% position in the SSNs and 1% in the SUNs, with both positions performing as expected. The cost headwinds have not disappeared but are reducing. The July numbers were slightly beneath our estimates in terms of EBITDA, but the affirmation of guidance points us to continued improvement in the final quarter of the year (to Oct-30).
- The SUNs are up a couple of points, so we are holding off increasing our investment here and will buy on any dips. Morrisons is a low volatility, non-discretionary spending underlying business with a bad balance sheet.
- We aim to earn a front-loaded 12% and 17% YTM while only taking a limited risk of default. Should Morrisons have to restructure, we are confident about our position and expect any fight for value to break out beneath the bonds.
- The potential forecourt sale could prompt a significant rally, which could cause us to review our position. However, we are waiting for more details, and management refused even to discuss a transaction on the investor call.
Morrisons Q3 22.23 Results:
- Revenue, excluding fuel, was in line with our expectations. Fuel was a miss, with revenue down 29% on last year due to the fall in the oil price.
- Adjusted EBITDA of £235m, this was £20m beneath our forecast, again mainly due to the Fuel business.
- Our FYE 23 EBITDA forecast is £913m, and we expect leverage at around 8.5x for the FY.
- Management has said that £200m of the promised £700m cost cuts have been delivered in the first three quarters, with £300m expected by year-end. If 50% of those savings are in the 2022.23 Underlying EBITDA => 80bp in EBITDA margin drag from price support.
- Reduced fuel prices and weather-impacted summer trading impaired the working capital inflows we had forecast. Management claimed £200m of underlying working capital improvements, but for now, we have assumed the usual net uptick in December with a reversal in the quarter to the end of January. The extra bank holiday and weather effects should be through the accounts in Q4, so we may see a better-than-expected cash performance.
- The McColls convenience business is profitable and consolidated since May 2023; we have added this to our model.
- Management refused to discuss the potential sale of the Morrisons forecourt business to MFG (another CD&R portfolio company). This transaction would reduce leverage but could require changes in the convenience strategy.
- We have cut our forecasts for the fuel business (but the impact on EBITDA is modest as we had expected margins to return to much lower levels). However, we still estimate that leverage will be beneath 5x in January 2027. Also, the potential sale of the Forecourt business offers an upside to our leverage target.
- The CEO, David Potts, is leaving and will be replaced in November by Rami Baiteh (ex-CEO of Carrefour France). Baiteh was at Carrefour for 20 years. Potts was CEO for nine years, and there have been rumours that CD&R was looking to replace him.
I look forward to discussing this with you all.
Aengus
https://www.retailgazette.co.uk/blog/2023/09/morrisons-ceo-rami-baitieh/
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