Wesfarmers Limited

Intense Competition: Wesfarmers Limited (ASX: WES) is a large-cap company with the market capitalization of circa $55.84 Bn as of July 16, 2018. The group has a diverse set of business operations across all the verticals such as supermarkets, liquor, hotels and convenience stores, home improvement, office supplies, and department stores. The primary objective of the Group is to deliver a satisfactory return to its shareholders. It targets to have better working capital efficiency with support from strong discipline in terms of capital expenditure or any other investment decisions. While planning to acquire a business, the Group checks that whether it is feasible or not by applying various filters relating to being competitive and providing long-term returns to its shareholders. On the financial front, EBITDA margin stood at 7.9% in 1HFY18 which is slightly above the Industry median (i.e., 6.7%). The current ratio and quick ratio were recorded at 0.95x and 0.36x during the same period.

 
Long-term earnings growth & strong cash flow generation (Source: Company Reports)

On the other hand, WES disclosed to ASX that one of its directors, Simon William English had a direct interest in the Company and acquired 1,000 fully ordinary shares via on-market purchase at an issue price of $46.81 per share. Meanwhile, the stock has risen 12.31 per cent in the past six months but down by 1.50 per cent in the last one week as at July 13, 2018. As of now, the stock is heading towards its 52-week high level ($ 50.470), hence we maintain our “Expensive” recommendation on the stock at the current market price of $49.650, considering the trading volatility while there is long-term earnings growth and cash flow generation. However, the group faces intense competition from Woolworths, ALDI and Amazon in its core business operation.
 

Domino's Pizza Enterprises Limited

Decent Outlook: Domino's Pizza Enterprises Limited’s (ASX: DMP) stock climbed up 1.043 per cent on July 16, 2018 after the positive market sentiments were seen to be backed by significant long-term growth supported by European business expansion. Besides this, the group has reaffirmed its full year guidance that was provided last year. However, it is expected that labour costs will be increased due to the implementation of strategic initiatives. Based on this, the group now expects NPAT growth guidance to be in the region of more than 20% with better same store sales, while FY18 Guidance on new store openings is between 310-330. The company will release its full year performance around August 14, 2018.


Network Sales Growth (Source: Company Reports)

On the financial front, RoE and RoIC moderately rose from 12.6% and 5.8% to 15.2% and 6.3%, respectively, in 1HFY18 against the prior corresponding period (pcp). Further, the current ratio and quick ratio stood at 1.20x and 1.06x, respectively in 1HFY18 while debt to equity ratio came at 1.26x during the same period. On the other hand, Commonwealth bank of Australia and its related bodies, a substantial holder of the group upwardly revised its holding from 7.11% of interest to 8.17% of the voting power. Meanwhile, the share price was up by 16.17 per cent in the past three months (as at July 13, 2018) and the stock currently is trading at a higher level. Hence, we maintain our “Expensive” recommendation at the current market price of $ 48.420 ahead of the earnings update.

 
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