Woolworths Group Limited

Decent Rise in EBIT before significant items:Woolworths Group Limited (ASX: WOW) is in food, general merchandise and specialty retailing through chain store operations. It has a market capitalisation of ~A$46.19 Bn as on 13 September 2019. The company has recently announced that Gordon Cairns has made a change to his substantial holding in the company by acquiring 1,608 ordinary shares on 30^th August 2019. In the release of FY19 results, the company stated that it witnessed robust customer scores, especially in the fourth quarter. It reported improved sales and profit in the second half throughout the group. The company further stated that it has wrapped up several landmark transactions for the Group or have commenced in the last 12 months. It added that sale of Petrol was finalised in April with the proceeds of $1.7 Bn returned to shareholders through a share buy-back.

The following picture provides an idea of the full-year 2019 performance and would be helpful for the investors:


FY19 Results Highlights (Source: Company Reports)

What to Expect:In the month of July, the company announced its intention to merge Endeavour Drinks and ALH, to be followed by a demerger or value-accretive alternative in the calendar year 2020. In FY20, it anticipates the uncertain consumer environment and input cost pressures to remain. The company also expects to face an impact from new enterprise agreements. However, it is well-placed in order to respond to these challenges. The company added that the Endeavour Drinks would continue to evolve to improve the digital experience, deliver more localised ranging and improve service and convenience. It expects a further reduction in losses as turnaround of BIG W continues and unprofitable stores are closed.

Stock Recommendation:With respect to New Zealand food, the cost of doing business (CODB) as a percentage of sales has increased by 25 basis points on a normalised basis primarily because of strategic investment into digital, IT and data capabilities. The net margin of the company stood at 2.6% as compared to the industry median of 1.5%, which reflects that the company is effectively converting its top-line into the bottom-line against the broader industry.
On the stock’s performance front, it provided returns of 2.97% and 13.98% in the time period of one month and three months, respectively. Currently, the stock is priced close to its 52-week high level of $38.100 with PE multiple of 17.80x. Hence, considering the above-stated facts and current trading levels, we give a “Hold” rating on the stock at the current market price of A$36.430 per share (down 0.736% on 13^th September 2019).
 

Sonic Healthcare Limited

Completed Strategic Divestment:Sonic Healthcare Limited (ASX: SHL) provides laboratory and radiology services to the medical practitioners, hospitals, community health services and their collective patients. It has a market capitalisation of A$13.23 Bn as on 13^th September 2019. On 10^th September 2019, the company has issued 366,569 fully paid ordinary shares for the exercise of options. Recently, the company published its full-year 2019 results, which were in accordance with its guidance. It reported underlying EBITDA growth of 6.7% on a constant currency basis. The company has wrapped up the strategic acquisition of Aurora Diagnostics in January 2019 and completed strategic divestment of non-core GLP Systems in June 2019. The EPS growth of the company has been impacted by Aurora acquisition-related capital raising and A$20 Mn one-off tax benefit in the prior year. The below picture provides a brief overview of the company’s FY 2019 results:


Financial Year 2019 Summary (Source: Company Reports)

Future Aspects:On constant currency basis, the company expects EBITDA growth in the range of 6%-8% on underlying FY19 EBITDA of A$1,052 million, and interest expense is expected to increase by around 3% for FY20. It anticipates capital expenditure to be significantly lower in FY20. It is anticipating effective tax rate of around 25%.

Stock Recommendation: Its cash generation from operations stood at A$847 Mn, reflecting a rise of 10% on the previous year. The company reported a gross margin and EBITDA margin of 83.8% and 17.3% in FY19 as compared to the industry median of 37.2% and 15.4%, respectively. On the stock performance front, it produced returns of 2.80% and 15.36% in the time period of three months and six months, respectively. As per ASX, the stock of SHL is trading closer towards its 52-week higher levels of $29.930, and therefore, probability for correction increases. Hence, considering the aforesaid facts and current trading levels, we put our watch stance on the stock at the current market price of $28.0, up 0.503% on 13 September 2019 and suggest investors to wait for better entry level.

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