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September 11, 2015
Having recently discussed potential retail sector bargains, could WM Morrison (MRW) be a candidate for acquisition? In summary, a major South African investor has been on a UK shopping spree lately and still has a billion quid or so left in the pot. The German discounters ALDI and LIDL who imported major price competition are privately owned. ASDA belongs to US giant Wal-Mart (WMT). The UK’s Sainsbury (SBRY) is over a quarter owned by the Qataris and Tesco (TSCO) simply has too big a price ticket and has only just begun still major restructuring. This leaves the less flashy MRW looking the most likely prey within the UK grocery market, the case possibly bolstered this week by first half financial results disappointing investors.
First half sales -5.1% in the 26 weeks to 2 Aug and profits down a more significant 47% wasn’t great news, however, new CEO David Potts’ cautiously optimistic outlook and closure of 11 mainly smaller stores as part of efforts to save £1bn and return to financial growth was positive. So is streamlining via sale of 140 loss-making ‘M’ local convenience stores, even if for just £25m and in stark contrast to competitor LIDL’s plans to open dozens of stores in some of London’s most expensive neighbourhoods. More restructuring at MRW is sure to follow but it is doing the right thing. And so long as the dividend is maintained, it represents a decent yielding portfolio addition. With acquisition premiums typically at 20-30% any bid could see the shares back at 2015 highs >200p.
The discounters continue to make the most of incumbent rivals’ struggles to grow sales and profits amid a relentless price war. There is far less stigma attached to shopping at the cheaper end of the scale following the recession. Everyone likes a bargain; especially the more well off. And value for money is more important than ever. Sitting in the middle of the sector, MRW thus represents an attractive investment opportunity in terms of being able to cater for both discount lovers wanting to trade up and up-market shoppers wanting to trade down without compromising on quality. While sector restructuring is far from over, current share price weakness in MRW (back near 2015 lows) means the grocer may represent even more of a bargain as it fixes itself up for the future.
Mike van Dulken, Head of Research
This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research
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