Market Analysis: Morrisons, Rolls Royce, Compass Group, Bayer & A Comment On Provident Financial

this week the team at THird Bridge take a look at Yorkshire-based Morrisons, luxury car brand ROlls ROyce, Pharmacet

Analyst Ross Hindle comments on WM Morrisons: "The retailer had a strong Q1 with Group like-for-like (LFL) sales (ex-fuel/ex-VAT) up 2.7% y/y, a beat on consensus."

"There is a big question mark over whether the easing of lockdown restrictions will be kind to Morrisons and the grocery retail market in general, with consumers expected to get out and about a lot more. The supermarket has also already lost 40 basis points of market share over the first three and half months of 2021, with many wondering if this marks a resurgence of the discounters."

"To avoid being stuck in an increasingly squeezed middle, Morrisons' continues to foster its relationship with Amazon, triggering much speculation about a full-blown acquisition by Amazon in the near future."

"Amazon Fresh helped boost online sales by 113% for the quarter. The Group has also recently expanded its offering into the brick-and-mortar channel , with three Amazon Fresh stores having opened in London already and all stocked by Morrisons. With consumers now well accustomed to online grocery shopping, Amazon has growing expectations for its Fresh concept. Our experts believe this partnership will prove a key differential growth factor for Morrisons."

"Despite currently coming off a low base, the experts we are speaking to expect Morrisons to continue to develop its wholesale business and to increase its margin accretive non-food and clothing offer. Like the rest of the big four, Morrisons is having to look well beyond food to find some margin protection."

Jack Winchester, also an Analyst at Third Bridge says:" As Rolls Royce held its AGM, it will be looking back on a first few months which seemingly have not been a great surprise. Flying hours logged by the company’s engines - and the metric by which Rolls Royce collects cash from customers - was at just 40% of 2019 levels and is expected to reach 45-55% for the full year.

Rolls Royce is trapped in a costly holding pattern until long-haul travel recovers, and that isn’t forecast to happen until at least 2024, according to many of our experts. The company’s focus on the wide-body engine market means that until more long-distance commercial jets are back in the air again Rolls Royce is going to continue losing money.

Rolls Royce can take some solace from the fact that the engines they have installed around the world are still relatively fresh. Our experts say this should shield them from much of the aircraft scrappage that is going to take place as airlines downsize their fleets and make way for newer aircraft.

Senior Analyst, Harry Barnick, comments that "Covid restrictions continue to sully Compass Group's results with their half-year figures showing a 30% decline in growth.

This week Yorkshire-based Provident Financial Axed Doorstep Lending. Provident Financial, which offer loans of between £100 and £1,000, has announced the axing of is dumping its doorstep lending business, putting thousands of jobs at risk.

James Andrews, personal finance expert at money.co.uk, said: “It’s easy to celebrate the collapse of high-cost lenders like Brighthouse and Provident, but it’s far harder to see what the hundreds of thousands of people who relied on them will do if they need cash for everything from essential bills to school uniforms now.

“The Government has announced plans for a new, interest-free loan scheme for those in need - but they are far from ready yet, let alone rolled out nationally.

“In the meantime, credit unions might be able to bridge the gap for those in need.

“But the worry is that the people who trusted in-person visits from known credit providers to access cash will turn to something worse.

“Any job losses in these difficult financial times are also worrying and I hope Provident are supporting those colleagues with jobs at risk.”

https://www.money.co.uk/guides/how-to-get-free-debt-help.htm

Compass Group has an overreliance on corporate demand for food services, which has been decimated by a newfound appetite for homeworking in the UK and the US. Corporate foodservice demand is forecast to recover more slowly compared to other segments such as healthcare and education.

Our experts expect corporate demand for food service to be structurally smaller post-covid whilst businesses reorganise themselves around employee demand for home and hybrid working.

Compass Group's ability to expand into new categories, such as delivery, will be fundamental to its survival. However, it faces stiff competition from aggregators in both the UK and the US, which threaten its evolution in this area.

Whilst the short-term remains challenging, Compass Group could pick up market share in the medium-term due to Covid, as smaller competitors go bust and outsourcing trends accelerate.

Investors will be paying close attention to any potential M&A in the market post-covid. Given its size, Compass could play a key role in consolidating the sector.

To finish this week's commentary, Sebastian Skeet, Senior Analyst at Third Bridge says on Bayer:

"On a currency and portfolio adjusted basis, Bayer’s pharmaceutical and consumer health franchise revenues were flat and declined 4% respectively whilst the Crop Science division grew 6% YoY. Core EPS declined by 3% and free cash flow was negatively impacted by legal settlement pay-outs”

"Bayer’s curevac-partnered mRNA vaccine candidate is currently in phase 3, with trial data due to be published soon. Initially thought to be available by the end of 2021, CureVac is reportedly looking to win regulatory approval by June. Given the safety concerns around the J&J and AstraZeneca vaccine candidates there remains a large unmet demand especially in mainland Europe and emerging markets."

"Concerns persist around Bayer’s Pharma Franchise. Key assets Xarelto and Eylea face imminent patent expiry and increased competition. From our conversations with experts, it does not seem the recent launch portfolio and the late-stage pipeline assets will be able to bridge the revenue gap, with Verquvo, Finerenone and NT-814, in particular, facing an uphill battle based on available data."

"Bayer has a battle on its hands to hold onto market share in soy, they left themselves open to a challenge as their crop protection, dicamba, created drift issues with farmers leading to legal battles over ruined peach trees. Corteva has come in with expert timing and a strong Enlist trait or seed characteristic.

"Bayer also has a dominant position in vertical farming seeds via their partnership Unfold with Temasek, however, the specialists we speak to see vertical farming as too costly and therefore ultimately limiting itself to providing high priced herbs and leafy greens to the affluent rather than production for the masses."

Third Bridge is a global primary research firm that interviews more than 6,000 internationally recognised industry experts and business leaders a year to compile 360-degree market intelligence for institutional investors. www.thirdbridge.com