Treasury Wine Estates Limited

Satisfactory Performance for March Quarter: Treasury Wine Estates Limited (ASX: TWE) has an engagement in Grape growing and sourcing, and wine production. The principal activities also include wine marketing, sales and distribution. The company recently published its Wine Australia exports data for the quarter ended March 2019. Its operating performance across all regions for the nine months to March 2019 which confirms continued positive momentum in Asia with record depletions delivered for the nine months ending March 2019, including strong trading performance across the key Chinese New Year festive period. Further, it confirms expectations communicated in February 2019 that Vintage 2019 in Australia (almost completed) is a very strong and high-quality luxury wine vintage for TWE with luxury intake approximately 10% increased on Vintage 2018 due to its multi-regional sourcing strategy.

H1FY19 Financial Performance: The Net Sales Revenue (NSR) increased by 16.4% pcp to $1,507.7 Mn, benefitting from 1.4% increase in volume, portfolio premiumisation and price realisation on Luxury and Masstige wine. Earnings before interest, tax and *SGARA (EBITS) increased by 19.4% pcp to $338.3 Mn. The net profit after tax increased by 17.1% pcp to $219.2 Mn. Cash conversion of 53.5%, principally reflects revenue growth and timing of sales execution in the Americas and Asia within 1H19, along with the foreign exchange translation impact on US working capital balances. Cash conversion for the seven months to January was 85%.The Board of Directors declared fully franked interim dividend of 18.0 cps.

*SGARA- Self-generating and regenerating assets


H1FY19 P&L Statement (Source: Company Reports)

What To Expect: The company has reiterated its guidance for reported EBITS growth of ~25% for FY19. It is due to a balanced earnings outcome across the fiscal year to reflect the even phasing of Luxury shipments between H1FY19 and H2FY19.TWE expects growth in FY20 reported EBITS in the range of approximately 15% to 20%, which is broadly in line with consensus. Additional updates are expected to be provided as part of the release of the FY19 results in August 2019.

Stock Recommendation: Its EBITDA margin and net margin for H1FY19 stood at 23.8% and 14.3% better than the industry median of 22.1%, and 12.2%, respectively, implying decent fundamentals than its peer group. Its ROE for H1FY19 stood at 6.2% which is better than the industry median of 5.8%, showing that the company generated better returns for its equity-holders than its peer group. Moreover, its P/B multiple is trading at 3.08x which is lower than the peer median of 4.05x. Based on the foregoing, we maintain our “Buy” recommendation on the stock at the current market price of $15.640 per share (up 0.968% on May 17, 2019).
 

Coles Group Limited

Decent Q3FY19 Performance: Coles Group Limited (ASX: COL) is a leading Australian retailer with over 2,500 retail outlets nationally. Its businesses include Coles Supermarkets, Coles Online, Coles Liquor, Coles Express, flybuys, Coles financial services, and Spirit hotels. Supermarket sales increased by 3.2% pcp to $7,272 Mn in the third quarter of the 2019 financial year, supported by a successful ‘Fresh Stikeez’ promotional campaign which drove high customer engagement. Coles Online reported a growth of 27%, with sales of over $1 billion on a rolling 12-month basis.


Supermarket Financial & Operational Metrics (Source: Company Reports)

Liquor sales revenue for the third quarter increased by 4.3% pcp to $735 Mn, and Liquor comparable sales adjusted for New Year’s Eve timing increased by 0.9%, with continued strong growth in Exclusive Liquor Brands in the wine category.COL has entered an incorporated Joint Venture with Australian Venue Co in relation to Coles’ hotel and retail liquor business in Queensland.


Liquor Financial & Operational Metrics (Source: Company Reports)

Express sales revenue, including fuel, for the quarter, stood at $874 million, a decline of 32.4% on the prior corresponding period, driven predominantly by changes to the terms of the Alliance Agreement.There was robust growth in Coles Express food-to-go despite an impact of year-on-year fuel volume declines. The company commenced New Alliance Agreement with Express’ fuel partner, Viva Energy, to restore growth in the Express business and better align both parties.


Express Financial & Operational Metrics (Source: Company Reports)

What To Expect: Guidance for net capex for FY19 has been narrowed to $700 – 800 million due to greater certainty over timing of project commitments for the remainder of the year. Five existing distribution centres will be replaced with two 70,000 square metre ambient facilities, one in Queensland and one in New South Wales, each with a 20-year lease.

Stock Recommendation: Its net margin for H1FY19 stood at 1.9% which is slightly higher than the industry median of 1.7%. Its ROE for H1FY19 stood at 13.6% better than the industry median of 5.6%. Moreover, its EV/Sales multiple for TTM stands at 0.5x which is lower than the industry median of 1.9x. Hence, considering the aforesaid facts and current trading level, we recommend a “Buy” rating on the stock at the current market price of $12.930 per share (up 2.864% on May 17, 2019).  

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