Lex: Wm Morrison

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Profit warnings used to come in threes. Wm Morrison has just issued its fifth in a year. Expected pre-tax profit of £50m-£150m this year is 60 per cent below consensus forecasts.

Morrison's reiteration that “there remains every indication” of a “significant“ recovery looks pretty ridiculous under the circumstances.

Chronic forecasting problems are a symptom of acquisitions that are out of control. Still, with pre-tax margins of 1 per cent, earnings will be very volatile. The risks to forecasts are now on the upside.

This does not mean the stock is cheap. For Morrison to have a sector earnings multiple of 13 times, it would need pre-tax profit of about £535m. That is conceivable: were the loss-making Safeway stores to achieve the margins of the core Morrison franchise, group pre-tax profit would be roughly £780m. But it is not likely. Earnings are also a generous measure: after high capital expenditure, operating cash flows will be negative.

In any other sector, the shares and credit rating would be much lower. That they are not owes much to the sector's fascination with the value of property assets to a notional third party. In Morrison's case, it is argued, this offers support around the current price of 180p. For this to be valid, that third party needs actually to exist and, miraculously, generate substantially more profit from those assets than the existing tenant. Morrison, whose acquisition of Safeway was largely based on this argument, is now an example of its poverty.

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