Morrisons - comment

After a break in the sun, it was back to reality for me with Morrisons FY21/22 results. Nothing in our thesis on the name has changed; Morrisons is a good company with a bad capital structure. Our interest was piqued by the cap rate on Morrisons recent sale and leaseback transactions which was 7%, whilst prime logistics space was yielding c4% in Q3 22. The deal was cheaper than £SSN’s that yield 13%, so a good source of liquidity for Morrisons and not bad for ICG. In terms of trading, Kantar Christmas numbers had already shown the sales drops for Morrisons were bottoming out, Q4 sales -2% vs FY -4.2% supported this trend. Morrisons has guided for higher EBITDA in 22/23. EBITDA Growth will need top-line growth to return as there are headwinds for the company. Gross margins in H1 will be hurt by inflation in the manufacturing side of Morrison's business and continued price support will be a drag for the year. The normalisation of petrol prices will also dampen the support for group EBITDA from fuel sales. We will update our model and projections in March when the Q1 results are released.