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Morrison's shares reverse as above-forecast profits flattered by debt cutting success, margins fall

AJ Bell investment director Russ Mould pointed out that “all of the profit uplift came from lower financial charges owing to the hard work Morrisons has put in to reducing its debt pile”
Morrison's trollies
Mould also noted that Morrison’s operating margin slipped to 2.7% from 2.9%, suggesting the competition “remains as brutal as ever”

Investors in Wm Morrison Supermarkets PLC (LON:MRW) failed to be enticed by the prospect of a special dividend, with the grocer’s stock dropping sharply on Wednesday as analysts noted above-forecast headline profits were flattered by its success in cutting debts.

In late afternoon trading, Morrison’s shares topped the FTSE 100 fallers list, down 4.2% to 216.9p, having swiftly reversed an early advance as analysts took a closer look full-year numbers from Britain’s fourth biggest supermarket group.

READ: Morrisons rewards shareholders with special dividend after reporting above-forecast profits

The Bradford-based firm posted an underlying pre-tax profit of £374mln for the year to February 4, up from £337mln a year earlier, and above analysts’ consensus for £371mln.

The group’s net debt was reduced by £221mln to £973mln, below its £1bn year-end target, although free cashflow fell to £350mln, down from £670mln a year earlier.

In a note to clients, AJ Bell investment director Russ Mould pointed out that “all of the profit uplift came from lower financial charges owing to the hard work Morrisons has put in to reducing its debt pile.”

He added: “Lower debt means less risk, and that is a good thing, but investors may want to see earnings from the grocer’s core day-to-day operations rise before they take a view that the company really is seeing off the threat posed by the discounters Aldi and Lidl, let alone more established rivals such as Tesco, Sainsbury and Asda.”

Mould also noted that Morrison’s operating margin slipped to 2.7% from 2.9%, suggesting the competition “remains as brutal as ever.”

“Nevertheless,” the investment director added, “Morrison’s boss David Potts and his team can look back on what they have achieved with some satisfaction, especially as they have cut net debt by so much and got sales, profits and dividends all growing again.

“Best of all, the reduction in debt and the massive pension surplus, means Morrison’s – and its shareholders – can hunker down for a long fight without having to worry about the interest bills it owes to its banks.”

Like-for-like growth still a slowing from H1

Meanwhile, Accendo Markets research analyst Henry Croft at Accendo Markets pointed out that although Morrison’s full-year like-for-like sales growth – excluding fuel - of 2.8%, was marginally ahead of the 2.7% analysts had expected and an improvement on last year’s 1.9% increase, some shareholders likely noted that was a slowing from first-half growth of 3.0% despite returning to 2.8% sales growth in the fourth-quarter

Croft said: “The announcement of a special dividend likely helped to attract a few buyers early this morning, however without a commitment to further special dividends, and capping a more than 10% rally from February’s lows, many shareholders are deciding to take profits and run.”

He added: “With the ever-present threat of German discounters continuing to snap at the heels of the established big four, further sales growth is likely required to inspire shareholder confidence”.

“Despite maintaining its 10.6% UK market share, according to Kantar, in order to stave off the impact of discounters perhaps this payout could have instead been used to further improve Morrisons’ online offering, as a noticeable lack of internet shopping from Aldi (bulky non-food items only) and Lidl (no online sales) provides a clear and present opportunity to offer customers a service not offered by the plucky challengers,” the analyst concluded.

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