Morrisons (LSE: MRW) (NASDAQOTH: MRWSY.US) reported its full-year results today and the firm’s outlook is grim, with a warning that profits will continue to drag in the year to come. This is a second straight profit fall for the grocer, and while it remains to be seen if the shares have much further to tumble — down 17% so far this year — calls will intensify from investors to unlock shareholder value through property disposals.
Softening the blow
Compared with its market capitalisation of £5.4 its property portfolio is worth £9bn. Of course, even if it wanted to, the grocer couldn’t sell all that property. But today it confirmed that it was looking to raise some £1bn through property disposals by 2017.
This is an idea that has been on the radar for some time now, with the aggressive activist fund Elliott Advisors going so far as to believe Morrisons should transfer its freeholds into a separately listed company, thus realising their full value.
However, with net debt forecast of £2.7bn, it’s unlikely that the entire proceeds of any sale will go towards a share buyback or special dividend. Rather, Morrisons will likely be conservative — keeping in mind pressures on the balance sheet — but if it is too conservative, the market is unlikely to react favourably, and the shares could dip further.
Rumours circulated last month that the founding family were talking with private equity firms and, albeit briefly, the shares jumped five percent. No doubt potential buyers would be eyeing up Morrisons’ property estate. Some people are good at investing in companies before a lucrative takeover happens. It’s a rare gift, but one that I’m not bestowed with.
Two competitors compared
Personally, I like hunting for value, and I believe that’s what Sainsbury’s (LSE: SBRY) (NASDAQOTH: JSAIY.US) offers.
The share price has underperformed the FTSE over the last two years, but this is an opportunity to pick up a top blue-chip for cheap.
This is what you get for your money:
1. While the grocer’s have suffered at the hands of discount rivals Aldi and Lidl, as well as at the premium end with Waitrose, Sainsbury’s has proven resilient. It competes both on price and quality, with sales of its Taste the Difference products improving 10% in the most recent quarter.
2. By 2016 Sainsbury’s plans to have 1,000 new convenience stores, which is double its present total. This is a red hot growth area, and one Morrisons is struggling to keep up in: the best locations are already gone. While Morrisons daddled, Sainsbury’s smaller stores have been enjoying sales growth of 15%.
3. Sainsbury’s dividend yield is 4.9%, which is actually less than Morrisons, but Sainsbury’s business isn’t stuck in the same mire as its competitor. Sainsbury’s is currently trading near to a 52 week low, but I’d be happy to pick up a market-beating dividend while I wait for it to fulfill its growth potential.
You may well be looking at an ideal value investment.
