Broker snap: Morrison's space expansion impresses

11th Mar 2011 11:06

Morrison's full year numbers came in slightly ahead of expectations, and Nomura remains encouraged by the grocery retailer's growth strategy and buyback.The group has committed to buying back £1bn of shares over a two-year time frame to be financed by a new facility initially and by a bond issue later this year. As a result, the Japanese broker expects around 10% of pro forma earnings per share accretion which should work through over the next two to three years.Additionally, after meeting its objective to lay 0.4 million square feet of selling space, Morrison "upped the ante" to target a quicker expansion over the next three years, representing space growth of 8% by 2013/14, "which should convert to an initial sales contribution of circa 5%, with more than 90% relating to food," says analyst Nick Coulter.The broker sticks with a 'buy' and target price of 280p.Matrix Group is also a buyer of the shares, with a higher target price than Nomura of 325p."We estimate that the buybacks will be earnings enhancing by 5.1% in 2011/12 and 8.8% in 2012/13," the broker said, adding the caveat that it is "impossible to forecast exactly when and at what price the shares will be bought back." Matrix's calculations assume an even spend on share buybacks throughout the two year period at an average of 300p a share this year and 330p a share next, but the later the buy-back programme kicks in, the lower the interest charge Morrison will have to swallow. "In typical Morrison fashion, the company expanded on its very steady move into ecommerce following the recent acquisition of kiddicare.com and the purchase ... of a 10% stake in FreshDirect, a profitable internet grocer operating in New York. (Shurely shome mishtake? Did they not spot the 'New' bit?)," the broker continued."The plan is to learn the ropes and launch morrisons.com over the next two years, offering non-food by 2012/13 and food by 2013/14. It remains to be seen whether Morrison can actually make a profit out of this. We do not believe that Tesco or Sainsbury do, certainly not if store costs were to be properly allocated to their online businesses. Morrison is giving itself every chance though, and the kiddicare business certainly seems to be scalable. It is unlikely that Morrison will overcommit capital without good visibility of profit," Matrix added."Further efficiency savings in the pipeline will allow Morrison to compete should competition hot up, while the new store opening programme is accelerating," the broker said, explaining its case for a "buy" recommendation.