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(Repeats Monday item)
* Profits set to grow this year after four years of falls
* Like-for-like sales seen rising for third quarter running
* New CEO cuts prices to narrow gap with discounters
* But over 60 pct of analysts rate stock as "underperform"
* Potts needs to cut prices more, analysts say
By James Davey
LONDON, Sept 12 (Reuters) - While investors have had theirsights trained on the biggest names slugging it out in Britain'ssupermarket price war, one former struggler, Morrisons,may be embarking on a quiet revolution.
Eighteen months after Chief Executive David Potts took over,the retailer is on course to return to profit growth this yearafter four years of falls caused largely by the rapid advance ofGerman discounters Aldi and Lidl.
That would put Morrisons, the fourth-largest supermarketgroup, on a par with market leader Tesco, which isexpected to post a small rise, and ahead of second-biggestplayer Sainsbury which is set to post another fall.
Analysts forecast Morrisons will report underlying pretaxprofit of 150 million pounds ($200 million) for the first halfof the year on Thursday, up from 141 million in the same periodof 2015.
But Potts has yet to win over the doubters. Shares in thefirm, which is based in the northern English city of Bradford,have risen 17 percent in the last year but remain a little below204 pence, where they were when he joined on March 16, 2015.Over 60 percent of analysts rate the stock as "underperform".
Morrisons is still losing market share but this is due toPotts's decision to close about 30 stores and sell a loss-makinglocal convenience chain. On the measure of sales at stores openfor over a year, he has made significant progress.
The firm has reported two consecutive quarters oflike-for-like sales growth, is expected to report a third onThursday and given current forecasts is likely to be thestrongest of the big four, which also includes Wal-Mart's Asda, on that measure over the first half.
There is also some evidence that the group may be in astronger position than its peers to cope with the consequencesof Britain's vote to leave the European Union. More tangibly,two deals with Amazon and Ocado to sellMorrisons products online could also boost profit.
PATRIARCH
Ken Morrison, the firm's boss for half a century and stillits Life President, gives what by his standards is a ringingendorsement of Potts. "I think he's doing very well, but there'sstill a lot of room for improvement," the 84-year-old son of thecompany's founder told Reuters.
By contrast, the patriarch of a family that still ownsalmost 10 percent of the group once described the strategypursued by Potts's predecessor Dalton Philips as "bullshit".
Potts, 59, joined Morrisons after 39 years with Tesco wherehe began by stacking shelves. His initial task was to steady theship after the group lost ground in its traditional northernmarket under Philips.
Potts has slashed prices, narrowing the gap with thediscounters. He has replenished shelves more rapidly, tailoredproducts to local tastes and improved service with, for example,more self-scan and express checkouts.
Analysts say he has also improved the look and condition ofthe group's 492 stores and sharpened up marketing, emphasisingits army of more than 9,000 trained butchers, bakers,fishmongers and other specialists who prepare more food in-storethan in other British supermarkets.
The changes appear popular. Like-for-like transactions wereup 3.1 percent in the first quarter, with sales volume growth up3.3 percent.
Analysts at Jefferies International, who have a 'buy' ratingon the stock, say the firm is misunderstood.
"Rarely have we seen such a negative combination of viewsboth from investors and sell siders," they said, noting thatabout 21 percent of Morrisons' freefloat stock is on loan forshort-selling by investors who expect the price to fall.
NAYSAYERS
Naysayers highlight the intensely competitive nature of theBritish grocery market, saying Potts needs to go even further onprice cuts, and fear a fight back by industry laggard Asda, theBritish arm of U.S. giant Wal-Mart.
Morrisons has invested heavily in food production andpacking and now has 14 plants, making it Britain's secondbiggest food manufacturer and most integrated food retailer.
While data is sparse, Morrisons says it imports less of thefood it sells than the 40 percent industry average.
This would make it less exposed than rivals to the pound'sfall of 9 percent against the euro and 11 percent against thedollar after Britons opted for Brexit. Potts has cut pricestwice since the referendum on June 23.
Morrisons also has a very small non-food offer, shunning thetrend of other big supermarkets which sell everything fromcoffee makers to washing machines and TVs. With many of thosegoods imported, here too Morrisons is less exposed to thecurrency swings.
It is also less exposed to the risk of a post-Brexiteconomic slowdown and a resulting drop in consumer confidencewhich would particularly damage demand for bigger purchases.Such a slowdown has yet to materialise but remains expected bymany economists.
Phoenix Asset Management, which owns nearly 1 percent ofMorrisons according to Reuters data, has estimated the firm'sfood production capacity has grown to about three times the sizeit was a decade ago. However, it says productivity, or volumegrowth, has not kept track, meaning it has scope to raiseoutput.
A wholesale supply deal struck by Potts with U.S. onlinegiant Amazon in February gives Morrisons the opportunity toincrease volume with little additional capital expenditure,boosting profitability.
Amazon's own assault on the UK grocery market is focused onLondon, where Morrisons is weak and has little share to lose butwhere Tesco and Sainsbury's are strong.
Morrisons is also benefiting from its own belated moveonline through a partnership with Ocado, a deal that Pottsre-negotiated, paying less upfront and holding on to moreprofit.
It also wants to expand the wholesale of its own-label foodsthrough an alliance with Motor Fuel Group (MFG) Britain's secondlargest independent forecourt operator.
BALANCE SHEET STRENGTH
Morrisons has significantly strengthened its balance sheet,with net debt forecast to be as low as 1.4 billion pounds ($1.86billion) by the end of its 2016-17 year, down from a peak of2.82 billion pounds in 2014.
Clive Black, analyst at the group's broker Shore Capital,says Morrisons stands apart with a lease-adjusted netdebt/earnings before interest, tax, depreciation, amortisationand rent (EBITDAR) ratio of 2.4 times. This compares with aforecast of 3.9 times for Sainsbury and 4.6 times for Tesco.
Black said that if trading remains sound and debt reductioncontinues, Morrisons may be able to consider something to please shareholders, such as a share buyback, over the next 18 months.($1 = 0.7509 pounds) (Editing by Kate Holton and David Stamp)
