Executive Summary
The provided coursework has made us enabled to evaluate the performance of the company Morrison’s regarding its comparison with the benchmark of the past year and with its competitor firm Greggs. The introduction which is chapter 1 of the paper provides the briefs of industry, company, methodology used for financial analysis and valuation. The objective of the paper is also provided in the introduction chapter, which is to evaluate the financial performance of Morrison’s regarding its profitability, liquidity, gearing and financial position. The Chapter 2 and 3 provides the analysis, discussions, calculations, and conclusions of the paper. The chapter 2 can provide with the calculations based on ratio analysis and valuation through the Dividend Growth Model. The Chapter gives the analysis and conclusions regarding ratio analysis and valuation through DGM model. The conclusion shows that the ratios even being positive are lower as compared to the competitor company Greggs. Furthermore, the valuation shows that the company is overvalued and thus the investment decision should be to sell the stock and not invest in it.
Chapter 1 | INTRODUCTION
FOOD RETAIL INDUSTRY IN BRIEF
Morrison’s Supermarket PLC is based in the UK and is trading in the FTSE 350 Index under the Food & Drug Retailers Industry Sector (London Stock Exchange, 2018). The SIC code is 47110 in which the nature of the business is the retail sale of non-specialized stores dealing in the food, tobacco and beverage sectors (Company Check Ltd, 2018). It is the sector in which supermarkets and associated activities are categorized. Giant grocery stores like Tesco, Asda, Sainsbury’s, and Safeway operate in this sector, which makes up about two third of all grocery sales. Morrison’s is considered as the fifth player in the industry, giving the “big four” run for their money (Kleinman, 2002).
MORRISON’S BACKGROUND
Founded in 1988 the Morrison’s Supermarket is the fourth largest supermarket grocery store in the UK has a market share of 10.7%. The company has taken control of the competitor Safeway in 2004 which transformed its whole presence in England. The company has about 500 stores in the UK out of which the Morrison’s family owns 10% stake of its ownership. The company is looking to expand in online business as well through its partnerships with Ocada and Amazon (Morningstar.com, 2018).
OBJECTIVE OF PAPER
The objective of this paper is to provide deep insight into the financial analysis of a company by using various financial tools. As per the requirement of the assignment, the company Morrison’s is selected from the FTSE 350 Index to be analyzed regarding its profitability, liquidity, value, and financial position. The competitor Greggs is considered for comparative evaluation. The paper is divided into three chapters; chapter 1 gives the introduction of the financial analysis, chapter 2 provides the analysis regarding financial ratio analysis and valuation, and chapter 3 gives the conclusion of the analysis.
Figure 1: Morrison’s Listed in FTSE 350 Index
METHODOLOGY
The methodology adopted to evaluate the financial performance of the company Morrison’s is based on the suitability to its operations. The use of comparative analysis will yield insights about the comparative position of the company in its industry. Ratio analysis will provide analysis of the financial performance of the company. The annual reports (Morrisons Corporate, 2018) (Greggs Corporate, 2017), and information published on Morningstar (Morningstar.com, 2018) (Morningstar.com, 2018), and Yahoo Finance (Yahoo Finance, 2018) is used for calculations. The Dividend Growth Model is used for valuation purpose.
RATIO ANALYSIS
The following shows the calculations for the ratio analysis of both companies; Greggs & Morrison’s for the years 2016 and 2017.
PROFITABILITY- FROM MANAGEMENT PERSPECTIVE
Table 1: Net Profit Margin
| Profitability -Management Perspective | MRW | MRW | GRG | GRG |
| Net Profit Margin | 2017 | 2016 | 2017 | 2016 |
| Net Income | $ 305.00 | $ 222.00 | $ 57.00 | $ 58.00 |
| Sales | $ 16,317.00 | $ 16,122.00 | $ 960.00 | $ 894.00 |
| Net Profit Margin | 2% | 1% | 6% | 6% |
Table 2: Operating Profit Margin
| Profitability -Management Perspective | MRW | MRW | GRG | GRG |
| Operating Profit Margin | 2017 | 2016 | 2017 | 2016 |
| Operating Profit | $ 436.00 | $ 217.00 | $ 72.00 | $ 80.00 |
| Sales | $ 16,317.00 | $ 16,122.00 | $ 960.00 | $ 894.00 |
| Operating Profit Margin | 3% | 1% | 8% | 9% |
PROFITABILITY- FROM SHAREHOLDER’S PERSPECTIVE
Table 3: Return on Equity
| Profitability-Shareholder’s Perspective | MRW | MRW | GRG | GRG |
| ROE | 2017 | 2016 | 2017 | 2016 |
| Net Income | $ 305.00 | $ 222.00 | $ 57.00 | $ 58.00 |
| Equity | $ 4,063.00 | $ 3,756.00 | $ 299.00 | $ 265.00 |
| ROE | 8% | 6% | 19% | 22% |
Table 4: Return on Assets
| Profitability-Shareholder’s Perspective | MRW | MRW | GRG | GRG |
| ROA | 2017 | 2016 | 2017 | 2016 |
| Net Income | $ 305.00 | $ 222.00 | $ 57.00 | $ 58.00 |
| Total Assets | $ 9,246.00 | $ 9,299.00 | $ 441.00 | $ 416.00 |
| ROA | 3% | 2% | 13% | 14% |
FINANCIAL POSITION PERSPECTIVE
LIQUIDITY
Table 5: Current Ratio
| Liquidity -Financial Position Perspective | MRW | MRW | GRG | GRG |
| Current Ratio | 2017 | 2016 | 2017 | 2016 |
| Current Assets | $ 1,176.00 | $ 1,308.00 | $ 107.00 | $ 93.00 |
| Current Liabilities | $ 2,864.00 | $ 2,747.00 | $ 128.00 | $ 121.00 |
| Current Ratio | 41% | 48% | 84% | 77% |
GEARING
Table 6: Interest Coverage
| Gearing -Financial Position Perspective | MRW | MRW | GRG | GRG |
| Interest Coverage | 2017 | 2016 | 2017 | 2016 |
| EBIT | $ 436.00 | $ 217.00 | $ 72.00 | $ 80.00 |
| Interest Payable | $ 88.00 | $ 98.00 | $ 1.00 | $ – |
| Interest Coverage | 495% | 221% | 7200% | #DIV/0! |
Table 7: Debt to Equity Ratio
| Gearing -Financial Position Perspective | MRW | MRW | GRG | GRG |
| Debt to Equity | 2017 | 2016 | 2017 | 2016 |
| Total Debt | $ 5,183.00 | $ 5,543.00 | $ 142.00 | $ 151.00 |
| Total Equity | $ 4,063.00 | $ 3,756.00 | $ 299.00 | $ 265.00 |
| Debt to Equity | 128% | 148% | 47% | 57% |
METHODOLOGY FOR PART 2 VALUATION
FORECAST DIVIDEND GROWTH MODEL
For the better understanding purpose, the method of dividend Growth Model is used to predict the value of the company share better. The data needed for the calculation purpose are collected from Yahoo Finance (Yahoo Finance, 2018), Morningstar (Morningstar.com, 2018) and UK Government Office for Budget Responsibility Report (Government of UK, 2017).
CHAPTER 2- FIRST PART ANALYSIS
The first part asks for the assessment of the financial performance of Morrison’s regarding its various ratios compared against the benchmarks of its past performance and its competitor’s performance. By looking at these, the analysis is given below;
PROFITABILITY- FROM MANAGEMENT PERSPECTIVE
Chart 1: Net Profit Margin (MRW)
The Net profit margin of the company Morrison’s has improved in the year 2017 by 1%. The Net profit margin in 2016 has been 1.38%, which can be attributed to the increase recorded in the net sales of the company. The revenue increased by 11% as compared to the year 2016 revenue translating into a 1% increase in the net profit margin. It was accounted for the sustainable, meaningful profit and sales growth with improved cash flow stream (Morrisons Corporate, 2018, p.1).
Chart 2: Net Profit Margin (GRG)
The Net Profit Margin of the company Gregg has been better than that of Morrison’s. The company Gregg’s Net Profit concerning its 2016-year performance has, however, lowered even though the revenue of Greggs has increased in 2017. The main cause has been the increment in the cost of sales, and administrative expenses. The cost of supply chain restructuring, including the redundancy, transfer of operations, property related was the main reason (Greggs Corporate, 2017, p.88).
Chart 3: Operating Profit (MRW)
The operating profit of Morrison’s has increased in 2017 increased by 3%, approximately even though the cost of sales and administrative expense is higher in 2017 as compared to 2016. It is because of the strong sales performance by Morrison’s in 2017.
Chart 4: Operating Profit Margin (GRG)
The overall operating profit for the company Greggs has declined in 2017 because of the losses incurred on the exceptional items. Excluding the exceptional items, the operating profit of the company has grown by 4.6 percent in 2017. The company reports strong sales in the year when the company was experiencing higher inflation cost than past financial years (Greggs Corporate, 2017, p.24). The company attributes the increment to the strong sales performance even though the company is facing a strategic change in its operations (Greggs Corporate, 2017, p. 8).
PROFITABILITY- FROM SHAREHOLDER’S PERSPECTIVE
Chart 5: ROE (MRW)
The ROE of Morrison’s increase in 2017 as compared 2016 because of the increment in the Net income of the company even though an increment in the equity was recorded as well. The increase in equity was due to the increase in share capital, share premium and retained earnings by the company (Morrisons Corporate, 2018, p.18).
Chart 6: ROE (GRG)
The return on Equity is the measure which shows the profitability of the company regarding the equity investment made. The ROE of Gregg has declined in 2017 as compared to 2016. It accounts for the relative increase in the equity of the company as compared to its return because of the increment in retained earnings (Greggs Corporate, 2017, p.77). Moreover, the net income of the company has also declined in 2016.
Chart 7: ROA (MRW)
The Return on Assets of the company Morrison’s has increased in 2017 as compared to 2016, even with the increase in its assets value because of the increment in Pension Assets, Property, Plant & Equipment, Stock, Debtors, and assets held for sale (Morrisons Corporate, 2018, p.18). It is because of the increment in the net income of the company.
Chart 8: ROA (GRG)
The ROA of the company has declined in 2017 because of the relative fewer increments in net income as compared to the increment in assets value. However, the ROA of Greggs is way higher than that of Morrison’s showing that it better utilized its assets to generate income.
FINANCIAL POSITION PERSPECTIVE
LIQUIDITY
Chart 9: Current Ratio (MRW)
The current ratio of the company Morrison’s has declined in 2017 even though the current assets value increased in 2017. It is because of the higher increase in the current liabilities of the company. The current liabilities have increased because of the short borrowings and increase in derivative financial liabilities (Morrisons Corporate, 2018, p.18). The current ratio of 0.4 is not good enough as the current assets are less than current liabilities of the firm showing its lower liquidity.
Chart 10: Current Ratio (GRG)
On the contrary, Gregg’s current ratio has not only got better, but is also higher as compared to Morrison’s. The current ratio has increased because of the substantial increase in the current assets, including the increment in inventories, trade and other receivables, and cash. (Greggs Corporate, 2017, p.77)
GEARING
Chart 11: Interest Coverage Ratio (MRW)
The interest coverage ratio of Morrison’s has improved in 2017 and reached four times the value of interest expense. The interest coverage has doubled in a year because of the decline in the value of the repayment of the borrowings. The repayment of borrowings totaled £16 Million which includes £17 Million on financing charges for the redemption of the financial instruments and £ 1Million for fees which were written off for repayment of the bonds. It was offset by £2 Million of gains related to the termination of the hedging arrangements (Morrisons Corporate, 2018, p.29).
Chart 12: Interest Coverage (GRG)
The interest coverage of Gregg is not significant in 2016 because of the offsetting effect of the interest income on cash balances of net interest (Greggs Corporate, 2017, p.90). However, the finance expense in 2017 is substantial showing the interest coverage of 72. It means that the company Gregg is yielding 72 times more income than its interest expense.
Chart 13: Debt to Equity Ratio (GRG)
The debt-to-equity ratio of Gregg’s has declined in 2017 as compared to 2016 because of the decline in total liabilities of the company. It is a better debt to equity ratio showing that the less than 50% of Gregg’s source of financing is dependent on the creditors.
Chart 14: Debt to Equity Ratio (MRW)
The debt-to-equity ratio of Morrison’s has declined in 2017 because of the decline in the total liabilities of the company. However, it is still higher than 1 showing that the value of debt is more than its equity portion.
CHAPTER 3- SECOND PART ANALYSIS
VALUATION
DIVIDEND GROWTH MODEL
This model is used for computing the value of Morrison’s against its current market value. The model used to consider a firm in steady state with its dividend growing at a sustained rate.
PARAMETERS FOR DGM
| Data: | |
| Beta | 0.03 |
| Risk-Free Rate | 1.71% |
| Dividend Per Share | $0.06 |
| Market Risk Premium | 18.81% |
| Growth Rate | 2.00% |
There are certain estimations and assumptions involved in this valuation. The beta value is collected from the Morningstar website for Morrison’s which measures the risk for the company shares. The risk-free rate is assumed to be same as the 13 week Treasury Bill Yield rate (Yahoo Finance, 2018). The market risk premium is computed from the 52-week S&P 500 index change (Yahoo Finance, 2018). The growth rate is considered from the 2017 Office for Budget Responsibility Report (Government of UK, 2017). The growth rate from this report and the one computed by dividend payout ratio are both considered for computation. The dividend value is collected from the annual report (Morrisons Corporate, 2018).
CALCULATIONS
Dividend Payout Ratio:
For the computation of the dividend payout ratio, the computations are hereunder;
| Dividend Payout Ratio | 36% |
| Cash Dividend | $127.00 |
| Net Profit | $356.00 |
| Dividend Payout Ratio | 35.67% |
Growth Rate:
For the computation of the growth rate the computations are hereunder;
| Growth Rate | ||
| ROE | X | (1-Dividend Payout Ratio) |
| 8% | X | 64.33% |
| Growth Rate | 4.83% | |
Cost of Equity (CAPM Model):
For the computation of the cost of equity, the computations are hereunder;
| Cost of Equity (CAPM) | |||
| Ke = | Rf + | Beta x | (Rm – Rf) |
| Ke = | 1.71% + | 0.03 x | 17.10% |
| Ke = | 2.22% | ||
Value of Morrison’s DGM Model:
For the computation of the Morrison’s share, the computations using the assumed growth rate are hereunder;
| DGM Model | |||
| Value = | D0 x | (1+g) | /(r-g) |
| Value = | $ 0.06 x | (1+2%) | / (2.22%-2%) |
| Value = | $ 0.06 x | 102.00% | / 0.22% |
| Value = | $ 28.63 | ||
For the computation of the Morrison’s share, the computations using the computed growth rate are hereunder;
| DGM Model (g = 4.38%) | |||
| Value = | D0 x | (1+g) | /(r-g) |
| Value = | $ 0.06 | 104.83% | -2.61% |
| Value = | $ (2.45) |
CHAPTER 4 –CONCLUSION
FINANCIAL RATIO ANALYSIS
The financial ratio analysis of the company, Morrison’s in comparison with Greggs, shows that even though the profitability of the company Morrison is better and improved in 2017 but the profits are higher for Greggs. The net profit margin and operating margins have both improved for Morrison’s in 2017 and fell for Greggs. However, the value is better for Greggs. The Shareholder perspective profitability ratios regarding ROA and ROE are better for Morrison’s. However, the value of profits is higher in Greggs even though it is declining as compared to its past year. The liquidity position is better for Greggs as well. The gearing ratio is also better for Greggs regarding interest coverage and debt to equity ratio.
Looking at the results, the investment decision that can be suggested would be to not invest in Morrison’s.
VALUATION
The value of the company Morrison’s is found to be $28.63 by using the assumed growth rate of 2% and $-2.45 by using the computed growth rate. The actual share value of Morrison’s is GBP 231.80 (LSE, 2018) which is way higher than the value computed by DGM method. Looking at the value of the Morrison’s it can be suggested to not invest in Morrison’s as its value can decline in the near future.
REFERENCES
Company Check Ltd, 2018. Wm Morrison Supermarkets P L C. [Online] Available at: https://companycheck.co.uk/company/00358949/WM-MORRISON-SUPERMARKETS-P-L-C/companies-house-data [Accessed 17 April 2018].
Government of UK, 2017. Office for Budget Responsibility | Fiscal Sustainability Report. [Online] Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_
data/file/583952/OBR_fiscal_sustainability_report_web.pdf [Accessed 17 April 2018].
Greggs Corporate, 2017. Greggs plc Annual Report and Accounts 2017. [Online] Available at: https://corporate.greggs.co.uk/sites/default/files/GREGGS_28224_AR2017.pdf [Accessed 17 April 2018].
Kleinman, M., 2002. ANALYSIS: Morrisons takes on Big Four stores. [Online] Available at: https://www.campaignlive.co.uk/article/analysis-morrisons-takes-big-four-stores/158028 [Accessed 17 April 2018].
London Stock Exchange, 2018. FTSE 350. [Online] Available at: http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/indices/constituents-indices.html?index=NMX&industrySector=5330&page=1 [Accessed 17 April 2018].
LSE, 2018. Mrw Morrison (Wm) Supermarkets Plc Ord 10p. [Online] Available at: http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary/GB0006043169GBGBXSET1.html [Accessed 17 April 2018].
Morningstar.com, 2018. Greggs Plc GRG. [Online] Available at: http://financials.morningstar.com/cash-flow/cf.html?t=GRG®ion=gbr&culture=en-US&platform=sal [Accessed 17 April 2018].
Morningstar.com, 2018. Morrison (Wm) Supermarkets PLC. [Online] Available at: http://www.morningstar.com/stocks/xlon/mrw/quote.html [Accessed 17 April 2018].
Morrisons Corporate, 2018. Morrison’s Preliminary Results 2018. [Online] Available at: https://www.morrisons-corporate.com/Documents/corporate2018/morrisons-preliminary-results-2017-2018.pdf [Accessed 17 April 2018].
Yahoo Finance, 2018. S&P 500 index. [Online] Available at: https://finance.yahoo.com/quote/%5EGSPC?p=^GSPC [Accessed 17 April 2018].
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