It is hard NOT to be bearish on the prospects for Wm Morrison Supermarkets (LON:MRW).
There’s the consolidation of the food retail sector which has left the Bradford-based grocer looking like Billy Nomates.
The putative merger of J Sainsbury plc (LON:SBRY) and Asda will create a new 800-pound gorilla of the supermarket jungle, supplanting a revitalised Tesco PLC (LON:TSCO), which is bound to ramp up competitive tensions.
And let’s not forget Germany’s Aldi and Lidl, which show no sign of curtailing their expansion plans.
It all makes for the perfect ‘ship storm’ for Morrisons, which increasingly looks like a marginalised, subscale operation with limited growth prospects.
Defying gravity?
So, why then has the share price seemingly defied the gravitational pull of the aforementioned negatives, rising 24% since hitting their nadir of around 204p on March 26?
After all, it’s not as if the company is on a bargain-basement forward price-to-earnings multiple. The forecast yield is on the stingy side, while predicted top-line growth could best be described as muted.
So, again, what’s the attraction? Well, according to Shore Capital, these basic investment yardsticks don’t tell the whole story.
The broker points out Thursday’s trading update not only beat expectations, it represents the tenth consecutive quarter of like-for-like sales growth. That’s no mean achievement in the current hostile environment for retailers.
Industry figures from Kantar Worldwide revealed Morrisons was the best home-grown performer last month. The same data underlined why Sainsbury and Asda are looking to merge with the UK’s number two and three ranked supermarket groups lagging the pack.
Self-improvement programme
Broker Shore said the sales traction Morrisons is gaining is part of an ongoing self-improvement programme.
It believes the company is operationally geared, meaning the top-line improvement will drop straight to the bottom-line.
“Morrison is a group that is increasingly in control of its own destiny, robustly positioned for any Asda-Sainsbury combination (should it happen),” said Shore in a note to clients.
So, it expects strong improvements in earnings and dividends and the prospect of recurring special payouts “supporting sustained double-digit shareholder returns”.
With the regulators seemingly more open to consolidation following Tesco’s £4bn takeover of cash and carry group Booker, speculation has begun to mount over Morrisons’ future.
This has only intensified following the Sainsbury-Asda deal announcement that could create a £14bn giant of the aisles.
But who has enough dosh to make a serious bid for Morrisons?
Bid speculation
In February, a private equity firm was rumoured to be sniffing around; however, this story, which ran in a newspaper not known for its City scoops, appeared a little far-fetched.
Putting it bluntly Morrisons is everything acquisitive buyout firms are looking to avoid. It’s in a sector that’s in decline and, as discussed above, the competition is tough and unyielding. Perhaps the cash flow characteristics appeal.
Amazon’s acquisition of the Wholefoods grocery chain in the US has raised an interesting prospect of the world’s largest online retailer making a £6bn dart for the group.
It’s a long shot, though industry analysts aren’t completely pooh-poohing the prospect.
Sector expert TCC Global, quoted in the industry bible Retail Gazette, thinks there may be mileage on the speculation.
“A takeover bid from Amazon is not beyond the realms of possibility, as the e-commerce behemoth looks to grow its footprint in UK retail—something that became clear after rumours surfaced that it made moves to buy Waitrose in 2017,” said TCC’s Bryan Roberts.
Whether bid interest will continue to support the share price remains to be seen. It’s also worth pointing out that it may only require a minor deviation from the consensus for this stock to lose its lustre.