Woolworths Group Limited

WOW Details

Changes in Leadership: Woolworths Group Limited (ASX: WOW) is involved in food, general merchandise, and specialty retailing via chain store operations. The market capitalisation of the company stood at ~$47.38 Bn as on 8^th September 2020. Recently, the company announced leadership changes for better support to its evolution into a Food and Everyday Needs Ecosystem, wherein Claire Peters, Managing Director of Woolworths Supermarkets would take the position of Managing Director of B2B and Everyday Needs. Current Managing Director of Woolworths New Zealand, Natalie Davis will return to Australia to assume the role of Managing Director of Woolworths Supermarkets. In addition, Colin Storrie, current Managing Director of Group Portfolio, will take the position of Managing Director of new business and partnerships.

For FY20, the company reported sales amounting to $63,675 million, an increase of 8.1% on a year over year basis. All businesses of the company, excluding Hotels, posted strong sales growth during FY20.  In addition, WOW experienced robust growth of 41.8% in online sales to $3,523 million. NPAT from continuing operations for the period amounted to $1,602 million.

FY20 Financial Summary (Source: Company Reports)

Key Aspects: Trading for the 8 weeks ended 23 August 2020 was strong with group sales growth of 12.4%. The company operates a robust business and expects progress on strategic priorities in the future. The company has scheduled to release its Q1 FY21 results on 27^th October 2020.

Risk Analysis: The company’s business activities are exposed to strategic, operational, compliance and financial risks as it operates in a retail environment. These mainly include risks arising from the rising market share of competitors, expectations of customers and business interruptions. 

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The company declared a fully franked final dividend of 48 cps; this took the full-year dividend to 94 cps. Gross margin and EBITDA margin of the company stood at 29.2% and 8.3% in FY20, reflecting year over year growth of 0.1% and 2.0%, respectively. Further, the company’s efforts to boost sales, manage costs, and invest for distribution expansion have laid the foundation for future growth. On the technical analysis front, the stock of the company has a support level of ~A$35.692 and a resistance level of ~A$40.5. We have valued the stock using the price/cash flow multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers such as Wesfarmers Ltd (ASX: WES), JB Hi-Fi Ltd (ASX: JBH), Harvey Norman Holdings Ltd (ASX: HVN), etc. Therefore, considering the robust sales growth in all businesses ex-hotels, online sales growth and growth in key margins, we give a “Hold” rating on the stock at the current market price of $37.370 per share, down by 0.373% on 8^th September 2020.

WOW Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Scentre Group

SCG Details

A Look at 1HFY20 Results: Scentre Group (ASX: SCG) is engaged in the development and management of property with a market capitalisation of ~$11.32 Bn as on 8^th September 2020. Recently, the company notified the market that it had received gross rent of $183 million in the month of August 2020, depicting 86% of monthly gross rental billings. The fundamental strength of its business is being reflected by the strategic location of its network of 42 Westfield Living Centres. For 1HFY20, the company reported operating earnings of $361 million and Funds from Operations of $362 million. The company managed to achieve gross cash inflow of $1,059 million and a net operating cash surplus (after interest, overheads, and tax) of $261 million.

Key Financials (Source: Company Reports)

Outlook: The company enjoys decent fundamental and is well-placed to deliver long-term sustainable returns through economic cycles. In addition, the company is focused on further implementing its strategic initiatives in order to enhance its deep knowledge, relationship, and engagement with its customers.

Key Risks: The financial results of the company could be impacted by the economic downturn, which may create challenging operating conditions. In addition, the business is also exposed to business risks, such as property ownership risks and property management and development risks.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months 

Stock Recommendation: The company’s liquidity position at the ended 1H FY20 stood at $4.4 billion, which are enough to cover all debt maturities to January 2023. Over the span of four years (2016-2019), the company reported growth in free cash flows, which showcases the use of working capital in an effective manner. The stock of SCG has corrected 20.15% and 28.05% in the past three and six months, respectively. In the past one-month period, the stock went up 13.54%. As a result, the stock is inclined towards its 52-week low level of $1.350, offering decent opportunities for accumulation. On the technical analysis front, the stock of the company has a support level of ~A$1.88 and a resistance level of ~A$2.396. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Thus, considering the decent performance in 1HFY20, adequate liquidity position, valuation and growth in free cash flows, we give a “Buy” recommendation on the stock at the current market price of $2.270 per share, up by 4.128% on 8^th September 2020.

SCG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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