Why Morrisons is optimistic despite profits slump

A takeover battle rather than financial success was the reason behind promotion to the FTSE 100. Our head of markets has the latest from the UK supermarket.

The half-year results are something of a sideshow to the main event, as the bidding war for Morrisons (LSE:MRW) enters its final stages in what is likely to be a short-lived return to the FTSE100.

Clayton, Dubilier & Rice are currently in pole position, with its offer of 285p per share valuing the company at around £7 billion and with the support of the Morrisons board. Rival Fortress is recommending that shareholders take no action at present, implying that there will be an improvement to its offer of 272p which is currently on the table. With Morrisons’ share price trading at a slight premium to the CD&R offer, the market is suggesting that the battle may indeed have a little further to go.

In the meantime, given the present situation, Morrisons has decided against paying an interim dividend, which is understandable although of some disappointment to its income-seeking shareholders, where a previous implied yield of 4% was attractive given the current interest rate environment.

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The pre-tax profit figure has fallen by 43%, due to a combination of lost profit opportunities and ongoing Covid-19 costs arising from the latest lockdown, with like-for-like sales also having dipped by 0.3% against strong comparatives from last year. More positively, this figure is up by 8.4% as compared to two years ago. Although revenues for the group overall increased by 3.7%, issues in the supply chain and pressure from rising commodity prices and freight inflation also affected the overall profitability mix.

However, the fact that Morrisons has upped its game on its online offering, largely prompted by the pandemic, has had a rapid impact, with like-for-like online sales ahead by 48% over the last year, and by 237% over the last two years. This growth was from a low base, but the progress has narrowed the gap between the offerings provided by Morrisons and its rivals.

Wholesale growth is also strong, driven by an extension of the tie-up with McColl’s (LSE:MCLS), whereby sales grew by 18.1% over the period and 36.7% over a two-year timeframe. 

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The outlook is understandably upbeat, when the restraints of the Covid-19 costs (£41 million in this period) and lost profits in cafes, fuel and food to go caused by the latest lockdown in the first quarter (£80 million) will have disappeared, immediately boosting profits.

Over the last year, the shares have risen by 51%, as compared to a gain of 36% for the wider FTSE250 where Morrisons currently resides, and 18% for the FTSE100 which it will imminently rejoin after demotion in March. Inevitably, the market consensus of the shares is now at a simple 'hold', as investors await further and probably final developments in the bidding saga.