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Morrisons investors spooked by inflation risk

The supermarket chain's recovery plan is bearing fruit, but uncertainty over cost inflation has spooked investors
March 9, 2017

Morrison (MRW) chief executive David Potts said last year's improvement in both like-for-like sales and profit came down to listening to the company's customers, but also warned investors that "it's only one year". Although the turnaround strategy is still in relative infancy, underlying sales - excluding fuel - remained positive for a fifth consecutive quarter, and were up 1.7 per cent for the year as a whole. Total turnover rose 1.2 per cent despite eight store closures. This was driven by higher volumes, while like-for-like transactions improved by 4 per cent.

IC TIP: Hold at 236p

This, along with a significant drop in administrative expenses and £32m of disposal profit, allowed for a distinct improvement in reported pre-tax profit. But even on an underlying basis, pre-tax profit rose 11.6 per cent. Morrison has managed to claw back another £393m in cost savings, bringing the three-year total to more than £1bn.

Investors are nervy about the rising costs of imported goods. Chief financial officer Trevor Strain said it was "too soon" to speculate about what effect input cost inflation might have this year, particularly as sales mix and contract renegotiations could help offset any impact on gross margins.

Analysts at Shore Capital expect pre-tax profit of £365m for the year ending January 2018, giving EPS of 11.9p (from £337m and 10.9p in FY2017).

WM MORRISON (MRW)
ORD PRICE:235.9pMARKET VALUE:£5.51bn
TOUCH:235.7-235.9p12-MONTH HIGH:250pLOW: 169p
DIVIDEND YIELD:2.3%PE RATIO:18
NET ASSET VALUE:174pNET DEBT:29%

Year to 29 JanTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201318.187926.711.8
201417.7-176-10.213.0
201516.8-792-32.613.7
201616.12179.55.0
201716.332513.15.4
% change+1+50+38+9

Ex-div: 25 May

Payment: 29 Jun