McColl’s Retail Group has signed a deal with Morrisons to supply grocery goods across its estate under the relaunched Safeway brand. Here’s how the analysts reacted.
Analysts Jonathan Pritchard and John Stevenson said: McColl’s wholesale contract has been awarded to Morrisons, an outcome that we find profoundly positive for both companies. We think that customers will greatly prefer the range of fresh, food to go and ready meals that Morrisons will enable McColl’s to offer (under the resurrected Safeway brand), and on the other hand it gives Morrisons a capital-lite way into the c-store sector. We are upgrading our FY19 numbers today by c20%, as the sales and profit density potential here is transformational. The price target change reflects this to a degree but 11xPE as a target feels extremely conservative, especially given that today’s news does not in any way rule out a bid from one of the other food retailers.
Clive Black, director head of research said: Morrison has announced a material expansion of its wholesaling activities. Wholesaling now forms a key part of David Potts’ strategy to broaden the business in a capital light manner through a long-term wholesale supply agreement with McColl’s; so bolstering the Group’s plan to deliver £50-100m of incremental profit stream outside the core supermarkets. Whilst de-minimus in FY2018, the agreement, which sees the return of the Safewaybrand to the high streets of the UK, is expected to lead to annualised wholesale revenues of c£700m (incl. tobacco) going into CY2019. We see this as an excellent development, which sweats existing assets and further bolsters the growth, the cash flows and returns of Morrisons, so supporting our broader investment thesis on a stock that has the capability to be durably shareholder friendly.
The Daily Retailer
Overall View: Well, McColl’s look to have played their cards well (by dumping its wholesale suppliers NISA and Palmer & Harvey in favour of Morrisons) and Morrisons itself has also done well, to find a big new customer for the revived Safeway brand and exploit its fresh food manufacturing capability in a “capital-light” way.
● More reaction to follow