Barron\'s - April 6 2020

M4 BARRON’S April 6, 2020

EUROPEAN TRADER

L

ike most of Britain’s big grocers,

Wm. Morrison Supermarkets

is riding high, as supermarkets

become defensive stocks with

booming sales from a nation stockpiling.

While the FTSE 100 crashed 18% in

the past four weeks through April 1, the

United Kingdom’s fourth-biggest

supermarket was up 0.2%. But there is

more than booming sales that makes the

firm a tempting bet for investors.

The company, known as Morrisons

(ticker: MRW.UK), differentiates itself

from its peers by having a vertical supply

chain—it owns many of the farms and

processing facilities that supply its food.

This is key at a time when product

sourcing is an issue because of the coro-

navirus pandemic. In addition, the busi-

ness fundamentals are strong—profits

are up, and management is successfully

turning the business around.

Morrisons also has a secret weapon—

a wholesale business with powerful part-

ners boosting revenues. It has teamed up

with Amazon.com—users can buy almost

the full range of items Morrisons offers—

and has also done a deal with retailer

McColl’s to supply its convenience stores

with its own-label products.

While the stock fetches a low 12.4

times this year’s expected earnings, it is

valued in line with its peers. James

Grzinic, an analyst at broker Jefferies, has

marked Morrisons a Buy and predicts

that the share price, currently about 180

pence, could jump 36%, to 245 pence.

In a March 18 note Grzinic said, “The

group should be able to deliver apprecia-

ble sales gains by further building sales

densities in stores and by expanding its

nascent wholesale activities.”

Morrisons has a market value of 4.1

billion pounds sterling, employs more

than 95,000 workers, and serves up to 12

million customers each week. In March,

it posted pretax profit of £435 million for

the 52 weeks to Feb. 2, up from £303 mil-

lion, on sales of £17.5 billion.

The company was started by William

Morrison in 1899 as a market stall selling

butter and eggs. It opened its first super-

market in 1961 and floated on the London

Stock Exchange in 1967, joining the FTSE

100 in 2001.

It has grown to more than 494 super-

markets but had been a dog of the sector.

Britain’s grocers, like their peers in the

U.S., have faced fierce competition from

discounters and a shift in shopping hab-

its toward buying groceries online.

Morrisons was in a worse position

than most because it was slow to embrace

online grocery shopping. It also lacked a

smaller convenience-store format, despite

a dalliance in buying old Blockbuster

retail sites that it later sold. The conve-

nience stores were ditched because they

were in the wrong locations.

In addition to the Amazon deal, which

was recently extended, Morrisons now

sells more products on Deliveroo. CEO

David Potts has said that the deal with

Amazon is for a “number of years rather

than on a rolling basis,” and Morrisons

will look for opportunities “to innovate

and improve the shopping experience.”

Some recent good news for the com-

pany: The U.K.’s top court on Wednes-

day ruled that Morrisons isn’t responsi-

ble for a 2014 data breach by a

disgruntled employee.

What’s interesting about the Amazon

deal is that it has progressed beyond just

a distribution agreement. This could have

major earnings potential over the longer

term, even though the details are sparse

and Morrisons operates only in the U.K.

The stock is also a strong play in the

short term because the company is bene-

fiting from the fallout of the coronavirus,

and the company’s business is helped by

owning much of its supply chain.

That makes Morrisons’ stock an

appetizing bet for investors.B

By Rupert Steiner

EMERGING MARKETS

Some Corporate Debt

May Be Worth the Risk

M

ounting emerging market

corporate debt has looked

like an accident waiting to

happen for some time.

Companies in the developing world

quintupled their borrowing since 2007 to

around $2.5 trillion, with a dollar bond

market worth more than $1 trillion.

Investors are acting like the crash has

finally come. The iShares J.P. Morgan

EM Corporate Bond exchange-traded

fund (ticker: CEMB) sank by 14% in the

coronavirus-infected month of March.

But the pandemic’s real consequences

in defaults and downgrades may prove

more like a fender bender, fund managers

in the space argue, leaving room for a

lucrative rebound. “Valuations are cur-

rently pricing in a very protracted shut-

down,” says Luis Olguin, an emerging

markets corporate portfolio manager at

William Blair.

Investors tend to think of emerging

market corporate debt, if they think of it

at all, as similarly risky to U.S. high yield.

That’s wrong. Nearly two-thirds of the

J.P. Morgan ETF comes from stolid in-

vestment-grade issuers like Saudi

Aramco or Latin American cellular giant

America Movil (AMX). The average

yield right now is about 4.75%, 1.3 per-

centage points higher than a comparable

ETF of U.S. investment-grade credits.

Bits of the emerging market corporate

world are proving near-havens for a bond

market in turmoil. Debt from Chinese

blue chips like e-commerce king Alibaba

Group Holding (BABA) or state oil giant

Cnooc (CEO) has largely recovered from

the coronavirus shock, while offering

coupons in the 4% range, says Edmund

Harriss, who manages Asian funds for

Guinness Atkinson.

“China has been much more defensive

than anything else in the corporate

space,” he says. “You’re not likely to see

the rug pulled out.”

More-adventurous investors are hunt-

ing for credits that haven’tbounced back.

Alex Stanojevic, an emerging markets

portfolio manager at TCW, is poking

around in the rubble of energy producers

slammed by shrinking demand and a

Saudi-Russian oil price war. Unlike the

U.S. shale patch, where highly leveraged

private companies might struggle, the

emerging market space is dominated by

state-owned giants like Petroleo Brasile-

iro (PBR), Colombia’s Ecopetrol (EC),

and Russia’s Gazprom (GAZP.Russia),

which are much too big to fail, he argues.

“We’re trying to make a distinction

between smaller producers and ones that

can count on government support,”

Stanojevic says.

William Blair’s Olguin is focusing on

systemically important banks in coun-

tries like Brazil, Mexico, or Turkey,

which can pull through despite distress

in their national environments. “In senior

financial paper, we’re seeing high single-

digit yields in companies with very low

liquidity risk,” he says.

The most intriguing fire to play with

might be the plethora of bonds issued by

some 40 Chinese property developers,

whose yields have soared to the 12%-15%

range. Few Chinese are out buying real

estate just now, and the companies face

$9 billion in payments this year, Harriss

estimates. But the better ones may well

refinance on domestic bond markets that

are dominated by state-owned banks.

“Chinese real estate has seen a sharp

drawdown on the back of uncertainty,

which may lead to a sharp rebound,” says

Warren Mar, head of emerging markets

corporate debt at Morgan Stanley Invest-

ment Management.

Or not. The average yield spread of

emerging market corporate bonds over

U.S. Treasuries nearly doubled during

March to 5.35 percentage points, Olguin

reports. But the peak during the

2008-09 crisis was more than 10. Buy

carefully.B

By Craig Mellow

U.K. Grocer Morrisons

Is Looking Appetizing