Bill1703
10 Mar 2017
Re: Results and valuation reflections "The cost saving element was over £1bn.... indicative of the kind of baggage the company was carrying from the last management mistakes. It's unlikely the company will be able to repeat savings at that high level... Don't you think that this will prove difficult when the next set of figures are announced?"Games - yes, on all counts. It doesn't mean that earnings or FCF will go DOWN, of course, but any further upside will be harder to win... the company claims it has identified further cost savings to make, but undoubtedly this will be smaller and more gradual going forward."... both Aldi and Lidl are still growing at double digit rates which is scary as they have a big plan for new store openings everywhere... I'm not convinced that MRW's positive turnaround, whilst eminently laudable, can continue at the same pace going forward - perhaps that view is what's now clobbering the share price."Following on from the above, and to conflate all your points... of course the turnaround will not continue at the same pace - or the shares would certainly be cheap! And yes, competition will remain fierce - from the Germans but also elsewhere.Consensus forecasts, before yesterday, were for EPS of (broadly) 12p this year and 13p next - so much more modest progress than the c.40% turnaround to near-11p last FY. And It could be the guided higher pension and depreciation charges will see some downgrades (though at least most of this should have been anticipated IMHO).In any event, I think this kind of more gradual progress should still be eminently achievable - even against this tough market backdrop, with further upside from lower interest (see previous post), some further cost savings, and a bit from ancillary areas (services, online, wholesale, etc). In particular, they are probably still under-earning on operating margins (2.6% now), given the benefits they should capture from their relatively vertically-integrated model - as long as the sales line at least holds up.And if they can continue to prosper through good execution on retail basics - and they are undoubtedly doing well here, at least for the moment - then there could be further upside beyond these figures. But this is, of course, a bigger "if"... and not one I'd want to bet on just yet. It would mean taking some share in a naturally finite and flat market... but there is some 78% of this market still to go for, which is not already MRW or Aldi/Lidl.Interesting that the SP is clawing back a bit today... overall, it supports my view that it's a solid enough HOLD for now - no better, sure, but no worse IMHO, given the operational momentum, management grip, and the potential for further financial progress (particularly in FCF and balance sheet terms) without needing much help from the market! But yes, this progress will now inevitably be more modest - and harder to win. And of course, it's equally hard to argue against anyone getting out at this SP - particularly if they can book a profit - given where we've come from.
gamesinvestor
10 Mar 2017
Re: Results and valuation reflections ""Games - for the last 2 years, I come up FCF figures of £573m (FY17) and £533m (FY16). Which equates to equity FCF yields of 10.6% and 9.8% at the current SP.""Bill - how are you calculating this (i.e. what formula are you using) and where are you plucking the data from to put into your formula?interesting to see how your approach differs from what the company does -- I'm all for looking at things a bit more conservatively.Games
Bill1703
10 Mar 2017
Re: Results and valuation reflections "Bill how are you calculating the Free Cash Flow differently than the company?"Games - for the last 2 years, I come up FCF figures of £573m (FY17) and £533m (FY16). Which equates to equity FCF yields of 10.6% and 9.8% at the current SP.As you see, these are quite a bit lower than the figures paraded by the company (as you quote in your next post). The big difference is they include asset/investment disposals in the figures, while I tend to leave such out, as they are typically less likely to be recurring. But there are no fixed rules on FCF, and these disposals are still hard cash, which have helped to bring down net debt to the now-comfortable levels. So their figures are valid enough - but I prefer to look to FCF as a guide to true net cash generating power going forward.They are unlikely to sustain FCF up at this 10-11%. There's been big working capital improvements and while these shouldn't reverse, these sort of gains will not be repeated - although the company indicates there is still a bit more to go for here. And capex will be higher this year.But then, there will be cash savings on lower interest, the cost pressures they flag (pension and depreciation charges) are non-cash.. and then there is the hope for further margin gains through efficiency and other savings. So I'd expect FCF to remain strong, if not quite at these stellar levels... and certainly well above the current (prospective) dividend yield of 2.5%.
gamesinvestor
10 Mar 2017
Re: Results and valuation reflections Bill, a couple of points that may or may not be that relevant, but worth a note :-The free cash flow fell from last year :-""Free cash flow of £670m (2015/16: £854m)""The cost saving element was over £1bn. That's a lot of cost saving and indicative of the kind of baggage the company was carrying from the last management mistakes.It's unlikely the company will be able to repeat savings at that high level.Don't you think that this will prove difficult when the next set of figures are announced?Also I don't know if you noticed in the Kantar reports, but both Aldi and Lidl are still growing at double digit rates which is scary as they have a big plan for new store openings everywhere.Love em or hate em, they are still expanding while the big supers are not, and whilst there is an argument for consolidation and running your profits, this is dangerous if these other players keep eating the pie, even if at lower profit. It doesn't matter what their profitability is at the end of the day, they are strong financially and can keep supporting their expansion plans.I still look at the prices in MRW-SBRY and they are well above the similar items in other shops (Aldi and Lidl are just two examples).I'm not convinced that MRW's positive turnaround, whilst eminently laudable, can continue at the same pace going forward - perhaps that view is what's now clobbering the share price.Games
gamesinvestor
10 Mar 2017
Re: Results and valuation reflections "FCF yields of 10-10.5% for the past 2 years, and on my own (more sustainable) FCF calculation, well below the figures they report themselves. "Bill how are you calculating the Free Cash Flow differently than the company?Does this mean you arrive at a free cash flow of significantly less than 10-10.5%, and where are you getting the 10-10.5% from?Games
Bill1703
09 Mar 2017
Results and valuation reflections Having been through it all in detail now, looks like encouraging progress and momentum on pretty much all fronts.The SP seems to be reacting to cautionary comment on food price inflation from weak GBP (which should hardly be news to anyone), and guidance on depreciation and pension charges £40-50m higher this year... not sure if this is in current forecasts, probably should have been? In any event, this is all non-cash, will be offset by £20m or so from lower interest, and then scope they identify for further cost savings and incremental profits from ancillary areas.In any event, a consensus 11.9p EPS this year doesn't look too demanding, and so a forward P/E around 20x. This obviously still needs to come down... hopefully from further EPS recovery, rather than, er, the other way! And with dividend cover pegged to around 2x, it'll be a while before this becomes a chunky yielder again (prospective yield c.2.5%).But it's the free cash flow and balance sheet that keeps me invested here. FCF yields of 10-10.5% for the past 2 years, and on my own (more sustainable) FCF calculation, well below the figures they report themselves. With future growth to be "capital light", this should be sustained to at least some extent, supporting the prospect that "surplus capital will be returned to investors" (which I think is a new 'commitment'?) Net debt/EBITDA is down to 1.4x, well below peer levels, and looks set to fall further.And supporting further EPS growth... as an illustration, net debt falling below £1bn this year and then beyond it could easily cut £50m from the current net interest bill, which alone could add nearly 2p to EPS, helping to bring the P/E back down to more reasonable levels. Overall, it's hard to argue the SP is anything less than 'fair value' and a degree of retrenchment after a strong run is hardly unreasonable - as per previous post discussions. But I see decent enough scope for further progress over the medium term, driven by superior FCF generation and its influence on EPS momentum, the balance sheet and longer term cash returns - all as long as operational execution remains anywhere near current levels.
Bill1703
09 Mar 2017
Re: Wonky "Whatever you say about Morrisons, I think they should be loudly commended on their "Wonky Veg" range initiative. "Yes indeed NB. As they say in their statement today, "Food retail is a simple business... but it is not easy."This is just one of the simple things which MRW are now doing quite well, for which they deserve both plaudits and success.
Norman Barrington
09 Mar 2017
Wonky Whatever you say about Morrisons, I think they should be loudly commended on their "Wonky Veg" range initiative. To have sold 25,000 tons in 2016 is an ecologically beneficial success, and helps everyone from farmers to shoppers with tight budgets, eat your heart out Tesco!
Bill1703
09 Mar 2017
Re: or is it?...... "That the good news is in the basket and they are now bailing out?"Games - most likely the reason. Travel and arrive, and all that...Have been through the figures and statement, all looks very solid to me - with more to hope for going forward. But will have a more detailed look...Possibly one or two downward pressure on forward profits - higher pension charge, slightly higher capex, etc? Not sure if that is in current forecasts, so maybe there may be some minor downgrades?But all looks set fair for the medium term... balance sheet increasingly strong, FCF generation still very strong, and a comment about returning surplus capital which I'm not sure I've seen before? Nothing here to justify sustained weakness IMHO...
gamesinvestor
09 Mar 2017
or is it?...... [link] the good news is in the basket and they are now bailing out?Games
gamesinvestor
09 Mar 2017
Consumer shrinking forecast? The budget exposed a forecast of shrinking consumer spending over the coming years.is this why MRW is down 4.37% as I type?Games - or is it something else perhaps?
gamesinvestor
07 Mar 2017
Re: Super - Markets "Still, I am holding on to mine for now... 'run your winners'"Bill, I consider mine a lucky win, since I bought in 2014, the stock got trashed for a long time and then recovered and I got out with a 5% profit recently.Coupled this with 13% gain between 2011 and selling in 2013 and I think that's my out on the sector.Retail exposure is just M&S -- coupled with Card which is in effect designer, manufacturer and retailer combined. Fingers crossed Archie Norman joins M&S and Card gets through it's blue patch and gets it's online up and running properly.Games
Bill1703
07 Mar 2017
Re: Super - Markets "Looking back at all Kantor's figures, Tesco have been losing market share at the rate of about 0.5% virtually every quarter for 6 or 7 years... Something is wrong with the reporting, since assuming Tesco started with about 32% years ago, they should be down at 18-20%."Games - I think they way they report it is on a quarterly basis, but comparing to the same quarter a year before. So a market share slippage of 0.5% is really a 12 month figure, rather than quarterly... which makes sense (ie. broadly 0.5% a year for Tesco over 5/6 years or so). "Games - well done MRW for sticking it too them -- although I still think it's already priced in, or maybe not, maybe it can stretch to a P/E of 30 or 40 or sumat."Yes, MRW is doing well - and yes, it's priced in! I noted the Questor column views - for all the good momentum, it's pretty brave to say Buy when (as Questor itself noted) the shares are trading at 20x FY 2018 earnings, which is effectively still two reporting years distant. And forecasts two years out have an unfortunate habit of not materialising... It's not even cheaper than TSCO any more, on the same basis (last time I looked). Still, I am holding on to mine for now... 'run your winners', and all that! Not that it's actually, er, a winner for me... but it's getting closer all the time...
gamesinvestor
07 Mar 2017
Super - Markets [link] to this virtually everyone gained or retained market share expect Tesco which supposedly lost 0.5%. - down to 27.9%Looking back at all Kantor's figures, Tesco have been losing market share at the rate of about 0.5% virtually every quarter for 6 or 7 years.Something is wrong with the reporting, since assuming Tesco started with about 32% years ago, they should be down at 18-20%.Games - well done MRW for sticking it too them -- although I still think it's already priced in, or maybe not, maybe it can stretch to a P/E of 30 or 40 or sumat.
swarfega man
06 Mar 2017
Re: Telegraph- Questor Sunday times also had a piece about there being a 10-11% uplift in profits to around £340M from £302M. I don't subscribe to the times so cant link.
