Comment: Morrisons’ proposed property sale poses long-term risks

Morrisons’ property review has hit the headlines but is this short-term radical action really sensible in the long run?

I noted the weekend financial press headlines that US activist-value-vulture investors are already encircling the asset rich superstore group with interest and concern. 

I can see scope for a modest realisation of cash from non-trading freehold assets and selective stores, which would reduce net debt and highlight the implicit value of the business. However, I’m circumspect about the desirability or likelihood of wholesale sale and leaseback activity - note that credit rating agencies tend not to discount the cash proceeds of the sale and leasebacks from the higher onward rental commitments.

While there can be short-term gains for (some) shareholders from a comprehensive property sale programme through distributions, we question whether such activity is in the interest of the company in the long-run; will the shareholders that may seek short-term radical action be there for the duration? 

Morrison is a low margin business and the desirability of intensifying operational leverage from a major property programme is highly questionable in my view.

Indeed, it is my view that any radical property action could jeopardise the viability of the group to our minds. Indeed, with its stated structure of four viable national supermarket chains in the UK, we wonder if the Competition Commission may have a say in the matter if radical property disposals were drawn out of Morrison’s.

Broader trends work against a major sale and leaseback activity from Morrisons in our view, aside from the financial folly of over-leveraging, from an operational perspective of a low margin business. It is not lost on us that Carrefour has recently bought back previously leased assets whilst Tesco is materially cutting its property divestments.

Therefore, we expect Morrison to announce modest property activity in its balance sheet review; maybe realisations of around £1bn.

For now we harbour concerns about why the British retail market is eschewing the Morrison brand to such an extent that it is. We have concerns that the commencement of an online offer and building convenience proposition is going to move the dial the right and meaningful way for the retailer.

Rather, we believe Morrison needs to underscore its reputation as a value based superstore, competing effectively with the hard discounters and Big Four players alike, whilst seeking to more effectively and gradually garner broader appeal.

Clive Black is an analyst at Shore Capital