The sell-side report for Wm Morrison Supermarkets plc

GGRROOUUPP AASSSSIIGGNNMMEENNTT CCOOVVEERR SSHHEEEETT
SSUUBBMMIITT VVIIAA MMOOOODDLLEE
COURSE NAME Financial Analysis and Equity Valuation
GROUP NUMBER Group 1
STUDENT ID NUMBERS
Dinu Olariu 2 1 6 1 2 9 0
Olga Katsarou 2 1 5 5 4 1 2
Cheng Yang 2 1 1 1 7 6 7
Inna Sokolova 2 1 2 0 2 1 1
DATE SUBMITTED: 2 3 0 3 1 5
WORD COUNT*: 2 5 8 6
*excluding bibliography, references and appendices

Table of contents
1. Executive summary……………………………………………………………………………….3
2. Industry overview, company background and business analysis………....………………………4
3. Performance analysis……………………………………………………………………………...8
4. Forecasting……………………………………………………………………………………….13
5. Valuation…………………………………………………………………………………………16

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3
WM Morrison plc. (MRW LN)
Consumer & Retail
Food & Staples retailing
Equity - United Kingdom
FRIDAY, 13 MARCH, 2015
Intrinsic Price1
(GBP) 158
Share price2
(GBP) 204
Overvalued
RECOMMENDATION SELL
Potential return3
-22,50%
One-year forward target price
(GBP)
168
1. Executive summary
 David Potts is the new CEO of Morrisons starting Monday, 16 March 2015. He has
previously spent 40 years at Tesco and was a member in the Executive Board for 14 years.
 We expect no immediate changes in the company’s strategy. The Chairman backs the
current strategy of prioritising capital discipline, improving customer offer and developing
the online model, but he requested a better implementer.
 The company announced declined performance in the last financial year, due to fierce
competition and a shift in consumers’ buying behaviour.
 The firm is expected to maintain its dividend policy of at least 5p / share in 2015/2016, but
the pay-out policy is uncertain afterwards.
 Over the last year, share price reached the highest value (214.90p) in March, 2014 and the
lowest point (151.70p) in October 2014, amounting for a decrease of 30% over 8 months.
The price recovered afterwards by approximately 34% and reached 204p on March 13.
Source: Yahoo Finance
1 Intrinsic price as of 13 March 2015. The price was determined using price multiples and the residual income model.
2
The share price as of 13 March 2015.
3
Potential return equals percentage difference between the intrinsic price and share price.

4
Hypermarket
s and
superstores
42%
Small
supermarket
s
20%
Convenience
stores
22%
Discounters
6%
Online
5%
Other
retailers
5%
Grocery sales channels, 2014
Source: IGD UK Grocery: Market and channel forecasts 2014-2019
2%
5%
14%
17%
Supermarkets Convenience Discounters Online
UK Grocery Channels: Annual growth, 2014-19e
Source: IGD UK Grocery: Market and channel forecasts 2014-2019
Exhibit 2.3
2. Company background, business strategy and position
Industry Overview
The UK grocery market has been growing constantly over the last 10 years. However, after the
financial crisis, the growth rate has decreased slightly, amounting for 2.8% in 2014.
Exhibit 2.1
Exhibit 2.2
Although hypermarkets and
superstores make up the largest
share in the UK grocery market,
online channels (17%),
discounters (14%) and
convenience stores (5%) are
estimated to register the highest
growth rate from 2014 onwards.

5
Tesco
26%
Sainsbury's
15%
Asda
14%Morrisons
11%
Co-op
5%
Waitrose
5%
M&S
3%
Aldi
4%
Lidl
3%
Iceland
2%
Farm Foods
1%
Others
11%
The allocation of grocery market shares,
2014
Source: Morgan Stanley research
Exhibit 2.4
+32%
+20%
+3%
+1%
+1%
0%
- 2%
- 4%
- 4%
Aldi
Lidl
Waitrose
Sainsbury's
Asda
Iceland
Co-op
Morrisons
Tesco
Sales growth/decline over 2014
Source: Morgan Stanley research
Although the
leading chains in the UK
grocery market are
Morrisons, Tesco,
Sainsbury’s and Asda,
their revenues stagnated
or declined significantly
during 2014, while
discounters’ sales (Lidl
and Aldi) increased by
more than 20%.
Exhibit 2.5
Company background
WM Morrisons Supermarkets plc (Morrisons) was originally founded in 1899 as stall in
Bradford Market and is now considered the UK’s fourth largest supermarket group. Currently
Morrisons retails groceries through 605 stores across the UK, out of which 102 are convenience
stores. Following main market trends, Morrisons made their first home delivery via their online
service in January, 2014.

6
Structure, Business strategy and Value drivers
Regarding financial reporting, Morrisons has a very simple group structure, operating only a
single retail business and providing no divisional disclosures. At the same time, Morrisons has a
vertically integrated supply chain business model. The value is created by producing their own fresh
food and buying stock from other suppliers and further reselling them to final customers. Their
business strategy is based on price neutralisation and products differentiation. As for their
development strategy, the group is oriented towards addressing customer shopping preferences by
lowering prices on own-manufactured products, accelerating online shopping growth and new store
openings.
Table 2.1: SWOT-analysis
SWOT Analysis
Strengths 1. Offering fresh and quality food at competitive prices
2. Differentiating through Market Street which provides a large range of high-
quality food
3. Reputation of selling freshly-made food through own-operated facilities
4. A well-integrated supply chain
Weaknesses 1. Lack of development of online distribution network
2. Inefficient use of check-out machines
3. Most stores located in remote areas
Opportunities 1. International expansion
2. Rising awareness of organic products
3. Development of the online shopping platform
4. Increasing demand for brand-named products
Threats 1. Growth of discount supermarkets
2. Inability to keep up-to-date with market trends
Source: Group’s analysis
Risks
 Competitor proposition
The grocery market is facing fierce competition in the UK. Even though Morrisons is one of
the big four supermarket brands, its sales decreased while Aldi and Lidl increased significantly in
2014.
 Growing online channel
Currently the online selling channel has the highest growth rate. Although this system is
underdeveloped in Morrisons, the company could increase their market share provided that they
further enhance their online platform in the near future. However, they are still far behind their
competitors and might incur difficulties in attracting customers loyal to other companies.

7
Competitors’ strategies
Some peers of Morrisons at European level are Tesco, Sainsbury’s, Carrefour, Metro and
M&S. Core future movements of these companies are listed as following:
 Tesco: Focus on development of multichannel, personalisation and customisation as well as
opening more convenient stores and ensuring large stores to be more attractive.
 Sainsbury’s: Increasing the supermarket’s opening hours.
 Carrefour: Opening more convenience stores that are nearer their customers.
 Metro: Improving the delivery service and expand their franchise.
 M&S: Keep developing ‘Plan A’ which is an environmental and ethical-oriented programme.

8
3. Performance analysis
This section comprises a brief ratio analysis of the company, by emphasizing the findings of
various profitability and liquidity ratios, along with a common size analysis of income statement
and balance sheet.
Table 3.1: Common size analysis of the income statement
Vertical analysis
Item /
Financial Year
2010 – 2011 2011 - 2012 2012 - 2013 2013 - 2014 2014 - 2015
Revenue 16479 100,0% 17663 100,0% 18116 100,0% 17680 100,0% 16816 100,0%
Cost of sales -15331 93,0% -16446 93,1% -16910 93,3% -16606 93,9% -16055 95,5%
Gross profit 1148 7,0% 1217 6,9% 1206 6,7% 1074 6,1% 761 4,5%
Other operating
income 80 0,5% 86 0,5% 80 0,4% 81 0,5% 78 0,5%
Administrative
expenses -324 2,0% -330 1,9% -337 1,9% -1250 7,1% -1670 9,9%
Operating
profit/loss 904 5,5% 973 5,5% 949 5,2% -95 -0,5% -696 -4,1%
Finance costs -43 0,3% -47 0,3% -75 0,4% -87 0,5% -105 0,6%
Finance income 13 0,1% 21 0,1% 5 0,0% 5 0,0% 7 0,0%
Share of profit of
joint venture 0 0,0% 0 0,0% 0 0,0% 1 0,0% 2 0,0%
Profit/loss
before taxation 874 5,3% 947 5,4% 879 4,9% -176 -1,0% -792 -4,7%
Taxation -242 1,5% -257 1,5% -232 1,3% -62 0,4% 31 -0,2%
Net Profit/Loss 632 3,8% 690 3,9% 647 3,6% -238 -1,3% -761 -4,5%
Horizontal analysis
Item / Financial
Year 2010 - 2011 2011 - 2012 2012 - 2013 2013 - 2014 2014 - 2015
Revenue 16479 100,0% 17663 7,2% 18116 9,9% 17680 7,3% 16816 2,0%
Cost of sales -15331 100,0% -16446 7,3% -16910 10,3% -16606 8,3% -16055 4,7%
Gross profit 1148 100,0% 1217 6,0% 1206 5,1% 1074 -6,4% 761 -33,7%
Other operating
income 80 100,0% 86 7,5% 80 0,0% 81 1,3% 78 -2,5%
Administrative
expenses -324 100,0% -330 1,9% -337 4,0% -1250 285,8% -1670 415,4%
Operating
profit/loss 904 100,0% 973 7,6% 949 5,0% -95 -110,5% -696 -177,0%
Finance costs -43 100,0% -47 9,3% -75 74,4% -87 102,3% -105 144,2%
Finance income 13 100,0% 21 61,5% 5 -61,5% 5 -61,5% 7 -46,2%
Share of profit of
joint venture 0 100,0% 0 0 1 2
Profit/loss
before taxation 874 100,0% 947 8,4% 879 0,6% -176 -120,1% -792 -190,6%
Taxation -242 100,0% -257 6,2% -232 -4,1% -62 -74,4% 31 -112,8%
Net Profit/Loss 632 100,0% 690 9,2% 647 2,4% -238 -137,7% -761 -220,4%

9
Table 3.2: Operating performance analysis – Historical perspective
Item / Financial Year 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015
Gross profit margin 6,97% 6,89% 6,66% 6,07% 4,53%
Net profit margin 3,84% 3,91% 3,57% -1,35% -4,53%
EBITDA margin 7,43% 7,44% 7,27% 9,89% 5,09%
Personnel expense 11,04% 10,71% 10,73% 11,12% N/A
SG & A cost ratio 1,96% 1,86% 1,86% 7,12% 9,93%
Table 3.3: Operating performance analysis - Comparison with peers
Item in 2014-2015 /
Company
WM
Morrison
Tesco Sainsbury
Marks &
Spencer
Metro Carrefour
Peers
average
Gross profit margin 4,53% 6,31% 5,79% 37,54% 20,97% 19,48% 15,77%
Net profit margin -4,53% 1,53% 2,99% 5,09% 0,00% 0,02% 0,85%
EBITDA margin 5,09% 6,17% 6,12% 12,09% 4,04% 5,01% 6,42%
Personnel expense N/A 10,54% 9,70% 13,69% 11,41% 10,33% 11,13%
SG & A cost ratio 9,93% 2,61% 2,25% 31,27% 21,13% 16,47% 13,94%
Table 3.4: Performance analysis - Historical perspective
Return on Equity after tax 11,66% 12,78% 12,37% -5,07% -21,17%
Return on Equity before tax 16,13% 17,55% 16,81% -3,75% -22,04%
Return on Assets after tax 6,53% 6,60% 5,49% -2,97% -9,33%
Return on Assets before tax 9,17% 9,21% 7,69% -2,40% -9,67%
Net profit margin after tax 3,84% 3,91% 3,57% -1,35% -4,53%
Net profit margin before tax 5,30% 5,36% 4,85% -1,00% -4,71%
Earnings per share (pence) 23,43 26,03 26,57 -10,23 -32,63
Return on total invested capital after tax 169,44% 191,67% 189,18% -65,93% -210,80%
Return on total invested capital before tax 234,32% 263,06% 257,02% -48,75% -219,39%
Table 3.5: Performance analysis - Comparison with peers
Item in 2014-2015 / Company
WM
Morrison
Tesco Sainsbury
Marks
&
Spencer
Metro Carrefour
Peers
average
Return on Equity after tax -21,17% 6,62% 11,92% 19,39% 2,67% 14,99% 5,74%
Return on Equity before tax -22,04% 15,34% 14,95% 21,44% 14,92% 20,04% 10,78%
Return on Assets after tax -9,33% 1,05% 3,55% 5,11% -1,25% 1,84% 0,16%
Return on Assets before tax -9,67% 3,61% 4,65% 5,81% 0,94% 2,84% 1,36%
Net profit margin after tax -4,53% 1,53% 2,99% 5,09% 0,20% 1,70% 1,16%
Net profit margin before tax -4,71% 3,55% 3,75% 5,63% 1,12% 2,27% 1,94%
Earnings per share (pence) -32,63 12,06 36,90 32,20 31,95 154,54 39,17
Return on total invested capital after
tax -210,80% 17,76% 43,77% 68,73% 3,95% 71,18% -0,90%
Return on total invested capital before
tax -219,39% 41,19% 54,89% 76,01% 22,03% 95,19% 11,65%

10
The vertical and horizontal analysis of income statement reflect a declining performance in
the last 2 financial years. Specifically, the company’s revenues decreased significantly due to lower
store turnover - caused by the challenging trading environment - and fall in oil price. Although the
company registered a declined, but positive underlying profit (£345m) in the last financial year,
high expenses with property impairment and onerous lease provisions caused a major operating loss
of £696m. Another item causing significant growth in administrative expenses in 2014-2015 was
the firm’s investment in customer proposition (issuance of Match & More cards and various price
cuts). However, last year the company adopted and is currently following a 5-year plan aimed at
increasing cost savings, improving working capital and lowering capital expenditure, which could
diminish these administrative overheads in the future.
The evolution of the operating performance and profitability ratios confirm the company’s
above-mentioned weakened results. Over the last 5 years, all indicators decreased (gross profit
margin, net profit margin, EBITDA margin, ROA, ROE, return on capital invested) and earnings
per share were even negative for the last 2 years, despite the raise in dividends granted to
shareholders. Moreover, last financial year all profitability and performance indicators of Morrisons
were below the peers’ average and most of them were even the lowest ones among the 6 retailers
group. Interestingly however, the firm’s gross profit margin of 4.53% was close to those of its direct
competitors (Tesco and Sainsbury’s), indicating that there is potential for the company to improve
these figures and even overtake its competitors in the future.
Table 3.6: Common size analysis of the simplified Balance sheet
Vertical analysis
2010-2011 2011-2012 2012-2013 2013-2014 2014-2015
Non-current assets 8011 87,6% 8537 86,6% 9185 87,3% 9299 86,7% 7943 86,6%
Current assets 1138 12,4% 1322 13,4% 1342 12,7% 1430 13,3% 1144 12,5%
Total assets 9149 100,0% 9859 100,0% 10527 100,0% 10729 100,0% 9171 100,0%
Current liabilities -2086 55,9% -2303 51,6% -2334 44,1% -2873 47,6% -2273 40,8%
Non-current liabilities -1643 44,1% -2159 48,4% -2963 55,9% -3164 52,4% -3304 59,2%
Total liabilities -3729 100,0% -4462 100,0% -5297 100,0% -6037 100,0% -5577 100,0%
Net assets 5420 5397 5230 4692 3594
Total equity
attributable to the
owners 5420 100,0% 5397 100,0% 5230 100,0% 4692 100,0% 3594 100,0%
Horizontal analysis
Non-current assets 8011 100,0% 8537 6,6% 9185 14,7% 9299 16,1% 7943 -0,8%
Current assets 1138 100,0% 1322 16,2% 1342 17,9% 1430 25,7% 1144 0,5%
Total assets 9149 100,00% 9859 7,76% 10527 15,06% 10729 17,27% 9171 0,24%
Current liabilities -2086 100,0% -2303 10,4% -2334 11,9% -2873 37,7% -2273 9,0%
Non-current liabilities -1643 100,0% -2159 31,4% -2963 80,3% -3164 92,6% -3304 101,1%

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Total liabilities -3729 100,0% -4462 19,7% -5297 42,0% -6037 61,9% -5577 49,6%
Net assets 5420 100,0% 5397 -0,4% 5230 -3,5% 4692 -13,4% 3594 -33,7%
Total equity
attributable to the
owners 5420 100,0% 5397 -0,4% 5230 -3,5% 4692 -13,4% 3594 -33,7%
Table 3.7: Liquidity analysis – Historical perspective
Quick ratio 0,24 0,24 0,24 0,20 0,25
Current ratio 0,55 0,57 0,57 0,50 0,50
Cash ratio 0,11 0,11 0,12 0,09 0,11
Cash / Total assets 0,03 0,02 0,03 0,02 0,03
Table 3.8: Liquidity analysis – Comparison with peers
Item in 2014-2015 /
Company
WM
Morrison
Tesco Sainsbury
Marks &
Spencer
Metro Carrefour
Peers
average
Quick ratio 0,25 0,51 0,49 0,22 0,40 0,56 0,41
Current ratio 0,50 0,73 0,64 0,58 0,77 0,84 0,68
Cash ratio 0,11 0,41 0,48 0,16 0,37 0,48 0,34
Cash / Total assets 0,03 0,18 0,19 0,05 0,21 0,23 0,15
Table 3.9: Activity ratios - Historical perspective
Inventory turnover 24,03 21,67 21,65 19,49 24,40
Average no. of days inventory in stock 15 17 17 19 15
Receivable turnover 61,49 55,20 62,25 55,95 53,22
No. days receivable outstanding 6 7 6 7 7
Total assets turnover 1,80 1,79 1,72 1,65 1,83
Non-current assets turnover 2,06 2,07 1,97 1,90 2,12
Table 3.10: Activity ratios – Comparison with peers
WM
Morrison
Tesco Sainsbury
Marks &
Spencer
Metro Carrefour
Peers
average
Inventory turnover 24,40 16,65 22,45 7,62 8,82 10,64 15,10
Average no of days inventory in stock 15 22 16 48 41 34 29
Receivable turnover 53,22 29,02 191,60 81,31 118,45 34,25 84,64
No. days receivable outstanding 7 13 2 4 3 11 7
Total assets turnover 1,83 1,27 1,45 1,3 2,37 1,74 1,66
Non-current assets turnover 2,12 1,84 1,96 1,58 4,26 2,98 2,46

12
Table 3.11: Debt & long term solvency ratios - Historical perspective
Liability-to-equity-ratio 0,69 0,83 1,01 1,29 1,55
Debt-to-equity ratio 0,55 0,67 0,86 1,01 1,32
Debt-to-capital ratio 0,35 0,40 0,46 0,50 0,57
Total debt / Total assets 0,41 0,45 0,50 0,56 0,61
Total equity / Total assets 0,59 0,55 0,50 0,44 0,39
Table 3.12: Debt & long term solvency ratios – Comparison with peers
WM
Morrison
Tesco Sainsbury
Marks &
Spencer
Metro Carrefour
Peers
average
Liability-to-equity-ratio 1,55 2,41 1,75 1,92 4,60 4,07 2,72
Debt-to-equity ratio 1,32 0,76 0,46 0,78 1,41 1,65 1,06
Debt-to-capital ratio 0,57 0,43 0,32 0,44 0,59 0,62 0,50
Total debt / Total assets 0,61 0,71 0,64 0,66 0,82 0,80 0,71
Total equity / Total assets 0,39 0,29 0,36 0,34 0,18 0,20 0,29
A brief balance sheet analysis reveals that over the last 5 years the current/non-current assets
ratio remained relatively stable, with no significant changes. Although by 2015 the intangible assets’
value raised with almost 200% since 2010-2011, the value of total assets remained relatively similar
due to the decrease in market value of fixed assets. However, a structural shift regarding company’s
debt policy can be observed in this period. Specifically, Morrisons contracted more long-term debt
since 2010 (increase of 138.4%), while the current debt has grown at a much lower rate (only 9%).
This trend was maintained last financial year, when the company issued a new 15-year £300m bond
and replaced its £1.2bn revolving credit facility with a 5-year £1.35bn facility. Still, although we
have witnessed constant increase in liability-to-equity ratio, this indicator was lowest against the
company’s peers in 2014-2015. Finally, the shareholders’ equity reduced overall relatively to 2010-
2011 mainly due to the significant fall in profit and, implicitly, retained earnings.
As far as the credit risk analysis is concerned, Morrisons had the lowest current ratio among
all peers in 2014-2015, which underlies both positive and negative aspects. The low quick ratio and
activity ratios show the firm manages its inventories better than its peers, mainly because of their
vertically integrated business model (based on owing most of their production facilities) and offer
of quality fresh food products. Nevertheless, taking into consideration the low cash ratio, we
assume that the company has some difficulties in terms of cashing in their revenues.

13
4. Forecasting
The key value drivers employed for forecasting are earnings, dividends and book value, as
one of the valuation models used in the next section is the residual income model. However, the
starting point of our forecast is the sales growth rate, because this is the main target indicator of
Morrisons’ business model. Morrisons’ sales forecast is derived from the company’s current market
position and estimated growth rate of grocery sector, which is justified by the high level of
dependency of market participants on the current industry trends (customer preferences of
shopping). The time period of our forecast includes 5 financial years, as after this period it is
difficult to predict industry trends and changes in customer behaviour.
Table 4.1 Forecasted income statement indicators, in £ millions
Item/Year 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Revenue 15975 15576 15623 15669 15716
Cost of sales 15017 14641 14685 14729 14773
Gross profit 959 935 937 940 943
Other operating
income
78 78 78 78 78
Administrative
expenses
1587 1507 1250 625 625
Operating
profit/loss
-550 -495 -235 393 396
Finance costs 105 105 105 105 105
Finance income 7 7 7 7 7
Profit/loss before
taxation
-648 -593 -333 295 298
Taxation 59 60
Net Profit/Loss -648 -593 -333 236 238
Source: the calculations are based on the assumptions explained below.
Table 4.2 Forecasted value drivers for residual income model, in £ mln
Item/Year 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Earnings -761 -648 -593 -333 295 298
Dividends 116.76 116.76 116.76 116.76 116.76
Book value 3594 2829 2120 1670 1849 2030
ROCE -21.17% -22.90% -27.96% -19.91% 15.96% 14.68%
Source: the calculations are based on the assumptions explained below.

14
Market analysis
According to the analysis of
the IGD4
, the UK grocery market
sales will increase by 16.3% over
the next 5 years. Assuming a
consistent rate over these 5 years,
the yearly growth equals to 3.07%.
Importantly, the greatest growth
will be contributed by online sales,
discounters and convenience stores,
which will seriously affect Morrisons’ revenues. This is evidenced by the fact that underdeveloped
online shopping and high customers demand for discounters have already led to a decrease in
Morrisons’ market share by 1% since February 2014. We estimate further decline by approximately
1% during 2015-2016 year.
As most of Morrisons’ revenues come from grocery operations (revenues from gasoline
stations are relatively low), our forecast is primarily based on grocery market. Meanwhile, oil prices
are currently decreasing, which affects negatively Morrisons’ comprehensive income.
Business strategy analysis
The current business strategy is focused on customer expectations and needs. The new CEO,
David Potts, has announced that during his first weeks he is going to ask for feedback from
customers and employees regarding possible company improvements. This strategy is fairly
promising and represents company’s willingness to address customers’ preferences. However, the
implementation of substantial changes will not be effective right away. In fact, it will take some
time before the company will be in line with market growth. Therefore, we assume a continuing
decrease in sales at the last year’s rate of 5% during 2015-2016 and a decrease of 2.5% in 2016-
2017, as by this time the company is expected to start carrying out customer-oriented changes (the
development of an IT platform and online model, opening of new convenience stores - features
included in 2015-2016 strategic plan). The decrease in total sales during the first two forecasting
periods can also be explained by lower prices. This is due to the ongoing cost savings programme,
4 The Institute of Grocery Distribution, “The next five years: how the UK grocery market will evolve”
http://www.igd.com/our-expertise/Retail/retail-outlook/21115/The-next-five-years-How-the-UK-grocery-market-will-
evolve/
21,4%
6,2% 4,4%
68,0%
24,1%
10,5% 8,3%
57,0%
Convenience Discounters Online Superstores
and
hypermarkets
Sales channels proportions of grocery
market, 2014-2019
2014 2019
Source: IGD forecast

15
which has already lowered prices for own-brand products by 17%. From 2017-2018, we predict
sales growth in line with the market at a rate of 0.3%5
.
The company does not have any stable payout ratio, and future dividend policy mostly
depends on the Board and the new CEO’s decisions. We predict Morrisons will not disregard
paying dividends completely as it would be inconsistent with the company’s past policy (the
company promised 2015-2016 DPS will not be less than 5p). Therefore, we assume DPS of 5p
during next 5 years as the financial situation will remain quite difficult.
Accounting and financial analysis
 We assume finance costs relatively stable as most of long-term debt has fixed interest rates.
 Administrative expenses are expected to decrease by 5% annually and afterwards to return
to the level before the implementation of the cost saving programme.
 Other operating and finance income is assumed to be constant as there are no significant
prerequisites for their change.
 The corporate tax rate which Morrisons uses starting April 2015 equals 20%.
 As it was derived from financial analysis, ROCE has been decreasing recently because of
lower profit and as reflected in our forecast, current prospects are rather negative.
5
0.3% is calculated by multiplying market growth of 3% by WM Morrison market share of 10%.

16
5. Valuation
For the valuation of Morrisons we used two different methods, specifically Price Multiples
and Residual Income Model.
Multiples
Multiples, and especially P/E, are used by the vast majority of analysts. This method relies on
the assumption that companies of similar size, performance and object of activity should have a
similar share price. In our evaluation, we use a set of different multiples in order to estimate
Morrisons' intrinsic price i.e. Normalised P/E, P/B, EV/Sales and EV/EBITDA.
Unfortunately, Morrisons had losses for two consecutive years so we used normalized
income6
for our analysis. Furthermore, in the retail industry, sales are the key performance indicator
which determines the profitability and future growth of the company, which led us to also include
EV/Sales multiple. However, the ability to minimise costs is considered to be of equal importance,
so EBITDA is a good proxy for the profitability of the company, as it is not influenced by
differentiations in capital structure, depreciation methods and other accounting techniques. Finally,
the selection of these multiples was underpinned by the fact that the majority of investors used the
aforementioned multiples when they evaluated Morrisons’ peers. Especially P/B can be used as a
measure of the consensus for the company’s growth opportunities.
The peers were selected from the UK and European food retail sector. However a number of
potential peers were excluded from our analysis either because they were not publicly listed
(Waitrose, Iceland, Co-op), they were not directly comparable (Asda as subsidiary of Walmart
which used US GAAP), or they were heavy discounters (Lidl and Aldi).
Moreover, in order to collect the data we used peers’ financial reports. In the cases that annual
reports were not published in the last quarter, we combined data from the last two semi-annual
results (M&S, Tesco, Sainsbury and Metro).
The intrinsic value is calculated as the average value of the fair prices suggested by the
different multiples. Target price in twelve months period is calculated as the future value of the
intrinsic value given the cost of equity (6.76%).
6
Normalized income was calculated as the sum of the net of tax of abnormal gain or loss on top of the income from
operations before extraordinary items minus minority interest and preferred dividends.

17
Table 5.1: Calculation of Enterprise Value7
Company Name
Share Price
(GBX)
(13/3/2015)
No of shares
outstanding
Equity Market
value (GBP)
(13/3/2015)
Debt
bearing
Interest
Cash &
Equivalents
Enterprise
Value8
WM Morrison
Supermarkets
PLC
204.00 2,335.09 4763.58 2519.00 241.00 7041.58
Marks & Spencer
Group PLC
493.60 1,647.02 8129.69 2303.00 206.00 10226.69
Tesco PLC 232.85 8,122.99 18914.38 13880.00 4901.00 27893.38
J Sainsbury PLC 259.10 1,914.59 4960.70 2989.00 1417.00 6532.70
Carrefour SA 2216.76 707.75 15689.14 10778.20 241.75 26225.59
Metro AG 2215.34 324.11 7180.14 4972.50 3793.60 8359.04
Table 5.2: Fundamental values for multiple valuation
Company Name
Equity Book
Value
Sales Earnings
Normalised
income
EBITDA
Income before XO
items
WM Morrison
Supermarkets PLC
3594.00 16816.00 -761.00 40.60 693.00 -761.00
Marks & Spencer Group
PLC
2786.60 10332.90 503.50 486.20 1293.20 502.10
Tesco PLC 13466.00 62116.00 160.00 1904.00 3241.00 865.00
J Sainsbury PLC 5517.00 23932.00 32.00 559.30 1442.00 670.00
Carrefour SA 7942.90 59740.10 1007.00 953.00 3157.20 588.30
Metro AG 3892.50 50490.90 64.50 320.60 1965.60 102.40
Table 5.3: Peers Multiples
Company Name P/E Normalised P/ E P/B EV/Sales EV/EBITDA
WM Morrison Supermarkets PLC N/A 117.33 1.33 0.42 10.16
Marks & Spencer Group PLC 16.19 16.72 2.92 0.99 7.91
Tesco PLC 21.87 9.93 1.40 0.45 8.61
J Sainsbury PLC 7.40 8.87 0.90 0.27 4.53
Carrefour SA 26.67 16.46 1.98 0.44 8.31
Metro AG 70.12 22.40 1.84 0.17 4.25
Mean Value of peers' multiples 28.45 14.88 1.81 0.46 6.72
7 All values are in millions except of share price, which is presented in GBX.
8
Enterprise value is calculated as the sum of Equity market value and debt bearing interest minus cash & cash
equivalents.

18
Table 5.4: Estimation of Intrinsic and Target Price
Mean value of multiple
Relevant Value
Morrisons
Estimated Intrinsic
EV Morrisons
Estimated Fair
Market Value
Morrisons
Estimated Fair
Stock Price
Normalised
P/E
14.88 40.6 N/A 604.13 £ 0.26
P/B 1.81 3594 N/A 6505.14 £ 2.79
EV/Sales 0.44 16816 7399.04 5121.04 £ 2.19
EV/EBITDA 6.23 693 4317.39 2039.39 £ 0.87
Intrinsic Price £ 1.53
Target Price in 12 months £ 1.63
Residual income (RI) Model
Recent research has provided evidence that the RI model is superior to other accrual-based
models due to the fact that a great part of the estimated intrinsic value is based on the present book
value of equity. We should further note that due do the recent changes in Morrisons' management,
future dividend policy is uncertain and for this reason DDM could not be applicable.
The inputs of the model are based on the forecasts in section 4, as well as on the assumption
that residual earnings will be constant from year 5 and onwards, as after the implementation of the
business strategy the company will be able to maintain this level. The cost of equity (6.76%) was
calculated using the CAPM with the following inputs:
 Risk free rate (Rf)= 1.7%9
which is the interest rate of the 10-year Gilt,
 Morrisons’s beta =1 given that food retail is relatively influenced by the state of the market,
 Market Return (Rm)=6.76%10
, which is the return of FTSE 100 for the last year.
9
Source: http://www.bloomberg.com/markets/rates-bonds/government-bonds/uk/
10
Source: http://www.bloomberg.com/quote/UKX:IND

19
Table 5.5: Calculations of Residual income model
T 0 1 2 3 4 5 6-onwards
Item/Year 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020 2020 - ∞
Earnings (ER) -761 -648 -593 -333 295 298
Dividends (D) 116.76 116.76 116.76 116.76 116.76
Book value of equity11
(BV) 3594 2829 2120 1670 1849 2030
Residual Earnings (RE)12
-890.95 -784.24 -476.31 182.11 173.01 173.01
Discounted factor (re=6.76%) 0.94 0.88 0.82 0.77 0.72 10.67
PV of RE -834.54 -688.07 -391.44 140.18 124.74 1845.33
Intrinsic Market Capitalisation (P0)13 £ 3790.22
Number of outstanding shares 2335.1
Intrinsic Price / share £ 1.62
Target price in 12 months £ 1.73
The values calculated using the two methods are very close to each other and clearly suggest
that Morrisons’ stocks are overvalued at the moment. However, the small difference could be
affected by the following factors:
 The identified comparable companies may not be as appropriate as expected.
 Multiples use historical data in contrast with RI model which uses forecasts. In the first case,
the past may not be appropriate for forecasting the future, especially in the case of
Morrisons, which operates under new management. In the second case, model inputs might
be wrongly estimated.
 Both models can have misleading results due to accounting manipulation.
 RI model includes the effect of dividend which is not considered in the multiple approach.
The final intrinsic price (1.58 £) and target price (1.68 £) were computed as the average
value of the two methods.
11
Book Value of equity was calculate using the formula: DERBVBV 1101 
12
Residual Earnings were calculated as: 1*  ttt BVrERRE
13
Intrinsic Value of Equity calculated as: 

 

1
t
t
00
)r(1
RE
BVP
t

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