Stocks’ Details

Coles Group Limited

Bright Future Prospects:Coles Group Limited (ASX: COL) is a leading supermarket retailer with 2500 retail outlets. Its core business includes- Coles Supermarkets, Coles Online, Coles Liquor, Coles Express, Flybuys, Coles Financial Services, Spirit Hotels.

Recent Developments: COL entered into partnership with Ocado Group where the later will provide access to its OSP (Ocado Smart Platform) technology to COL. For the purpose, Two CFCs (Customer Fulfilment Centres) are planned to be operational by FY2023. Capital expenditure inclusive of upfront Ocado fees is anticipated to be in the range of around $130 million to $150 million over the four year development and construction period. The development will bring in lower cost, improved network capacity, product availability etc leading to an improvement in profit margins for COL.

Recently, Coles had made an announcement that they have entered into incorporated Joint Venture with Australian Venue Co (or AVC) in relation to its hotels business, Spirit Hotels. AVC happens to be a highly experienced and responsible operator when it comes to hospitality assets

1H FY2019 Result Review: COL recorded strong numbers for first half of FY19 with YoY growth of 2.6% in sales revenue coming in at $20,867 million. The group’s EBIT saw a decline of 5.8% to $733 million mainly on the back of lower Express EBIT and additional corporate costs. The favourable seasonal working capital movements have resulted in strong cash realisation (normalised) of 141%.

 
Strong Cash Generation (Source: Company Reports)

What to Expect from COL:Management has narrowed the net capex for FY19 to $700-800 million. COL’s Supply Chain Modernisation project will see an initial payment to be paid in second half. The company’s management targets dividend pay-out ratio at 80-90% of earnings from 28^th Nov 2018 to 30^th June 2019, payable in September 2019.

Stock Recommendation: At current market price of $12.210 per share, stock is trading at P/E multiple of 21.910x. The stock has risen 6.5% in last one-month whereas, on YTD basis, stock has gone up by 3.5%.From valuations perspective, the company’s P/B ratio stood at 6.1x which is quite higher as compared to industry average of 2.6x reflecting that the stock is quite overvalued at the current trading juncture.

Hence, with the above-mentioned factors, we maintain our “watch” stance on the stock at the current market price of $ 12.210 per share (up 0.743% on April 8, 2019). Further, we advise that market players should wait for the stock to witness a correction and then make an entry at reasonable levels.
 

Sydney Airport

Further Improvement in Fundamentals:Sydney Airport (ASX: SYD) is owned by SAL group. The investment policy of SAL Group is to invest funds in accordance with the provisions of the governing documents of individual entities within SAL Group.

Financial Performance of FY18: Overall, the revenue for the business increased by 6.8% primarily because of international passengers coupled with strong performance from retail and property.  The balance sheet strengthened further with cashflow cover ratio going up from 3.0x in FY17 to 3.2x in FY18. Net debt/EBITDA reduced to 6.6x in FY18 as compared to 6.7x in FY17.


Strong Performance in FY18 (Source: Company Reports)
 
What to Expect: The management provides a 3-year capex guidance of $0.9-$1.1 billion for the 2019-2021 period. The management is expectedto deploy between $390 million-$440 million in 2019.


Growth Across the Business (Source: Company Reports)

For the month of Feb 2019, The number of International passengers moving through the Sydney Airport were marginally ahead of prior corresponding period, growing by 0.4%.However, the domestic passenger numbers witnessed the fall of 2.7% on pcp.

Stock Recommendation: Looking at the price movement, stock has risen 10.53% on 1-year basis. At current market price of $7.270, stock is trading at a P/E multiple of 43.800x with a market capitalization of $16.34 billion and annual dividend yield stands at 5.18%.

The company’s stock has witnessed the rise 1.69%, 10.20% and 7.42% over the span of one-month, three months and six-months, respectively pushing the stock closer to its 52-week higher level. 

As a result, we have a “watch” stance on the company’s stock at the current market of A$7.270 per share and we further advise the players to look for correction in the upcoming periods as, we presume, that the current trading juncture had discounted some key growth catalysts.