Half year results from Yorkshire-headquartered grocer WM Morrison Supermarkets (MRW) are a real treat for investors that have kept faith with the retailer in recent years.

Besides sharply accelerating growth, the David Potts-steered supermarket reports lower net debt, an 11.4% hike in the ordinary dividend to 1.85p and announces a maiden interim special dividend of 2p.

Yet the shares are off 1.65p at 264.15p this morning, with investors perhaps believing a second quarter sales spike was a favourable weather-to-football World Cup one-off and growth will level off sharply.

MORRISONS HAS MOMENTUM

Morrisons’ underlying profit before tax grew 9% to a better-than-expected £193m in the half to 5 August and like-for-like sales skipped 4.9% higher, an acceleration from the 3% posted in last year’s comparable half. Moreover, second quarter like-for-like sales shot up 6.3%, the strongest rate seen since 2009.

‘Strong growth, including our best quarterly like-for-like sales for nearly a decade, together with another special dividend for our shareholders, shows how new Morrisons can keep improving for all stakeholders,’ comments entrepreneurial operator Potts (pictured below).

The architect of Morrisons’ miraculous recovery and compelling growth strategy, assisted by bean counter Trevor Strain, is ‘confident that our exceptional team of food makers and shopkeepers can keep driving the turnaround at pace.’

WHOLESALE GROWTH ACCELERATES

Excitingly, Morrisons says its target of £700m of annualised wholesale supply sales will be achieved ahead of original guidance and that it is on track to hit £1bn of annualised sales ‘in due course’.

During the second quarter, its wholesale supply partnership with neighbourhood retailer McColl’s (MCLS) progressed more quickly than expected, while ongoing wholesale progress was made with Amazon (online), forecourts play Rontec and a new supply arrangement with Channel Islands-based Sandpiper.

THE EXPERTS’ VIEW

‘Morrison is demonstrably not a stock to short, in our view, and with the roof fixed and ideas a plenty to organically develop, a defensive UK stock appears to have a bright future,’ insists Shore Capital, upgrading its year to January 2019 pre-tax profit forecast by 0.5% to £412m and its 2020 estimate by 1.1% to £448m.

The house broker reminds clients that the half was ‘a volatile trading period for the group with extremes in weather with the “beast from the east” and “Southgate & sun” plus distinctive issues such as the C02 shortages. Accordingly, operational agility was required as well as building upon the sound fundamental platform that Messrs Potts and Strain have engineered at Morrisons.’

Shore Capital sees the 2p special dividend as ‘fabulous news to our minds, reflecting the balance and effective work of the company. Taking our medium-term projections into account, we now upgrade our ongoing special dividend per share expectation by 2p to 6p.’

The brokerage also sees the proposed J Sainsbury (SBRY)-Asda merger as providing more scope for opportunity than constraint. ‘Morrisons can remain focused as two of its competitors grapple with the matter of seeking to merge. Sainsbury’s and Asda face into a sustained period of potential distraction from the ongoing investigation by the Competition and Markets Authority (CMA) into their proposed merger in our view.'

AJ Bell investment director Russ Mould comments: ‘At present the business is clearly on a roll, but the big question is for how long this can last. Latest figures from Kantar Worldpanel show that Morrisons has a 10.4% market share, bigger than Aldi and Lidl but much less than Tesco (TSCO), Sainsbury’s and Asda.

‘Should Sainsbury’s get clearance from the competition authorities to merge with Asda, Morrisons would suddenly look much weaker. That may prompt Morrisons to seriously think about a tie-up with Co-Op.

‘Combining forces would theoretically see an enlarged Morrisons/Co-op business have a 17% market share based on the latest Kantar numbers. That is still less than the 30.7% share from a combined Sainsbury’s/Asda, but clearly enough to put Morrisons significantly ahead of Aldi and Lidl.'

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Issue Date: 13 Sep 2018