Morrisons – Reasons to shop at Morrisons – Positioning
All,
Please find our slightly updated analysis here.
Despite continuing cost headwinds, we continue to like the SUNs as we expect Morrisons market share to stabilise and profitability to grow over the next two years. The equal pay case for ASDA will reach judgment this month and Morrison’s case will follow. After the Next case, some compensation will likely be due, but a discrimination finding is unlikely (reducing the cost). With the court process in the public domain, investors will not be overly spooked by any judgment in the ASDA case, but some initial nervousness is possible. Nevertheless, we are taking our position now as we see the reasons to buy Morrisons outweigh any short-term volatility.
Investment Rationale:
We are adding 2% of NAV to our long position in the Morrisons SUNs bringing our holding to a total of 3% of NAV. The SUNs are currently offered at 73p/£ giving a yield of 15.3%. Our original 1% holding was bought at 63p/£ in March 2022 and has returned 25% over that time.
We expect a return of near 19% over the next 12 months (7 points of capital and 6.75 points of coupon). The downside is 5 points if Morrisons' market share losses do not fall off.
- We continue to hold our 2% position in the SSNs which have returned 40% over the last two and half years (19 points of capital and 12 points of coupon). With these bonds trading at 94 p/£ we will review for an exit when we see further opportunities.
- The 780bp differential between the 2027 SSNs and the 2029 SSNs is excessive given the significant equity cushion in our DCF calculation Indicated LTV of around 57%).
- Morrisons continued to suffer cost headwinds in Q122.23, and its price support will continue to be a drag over the next two fiscal years. We expect EBITDA to increase in 2025/26 and beyond. We are disappointed that the price support hasn’t been reduced; Morrisons (and ASDA) have lost ground to the discounters and need to get volumes rising again before introducing price rises. Morrisons is a low volatility, non-discretionary spending underlying business with a bad balance sheet.
- Should Morrisons have to restructure, we are confident about our position and expect any fight for value to break out beneath the bonds.
I look forward to discussing this with you all
Aengus
T: +44 203 744 7055