Wesfarmers Limited

WES Details

Business Update: Wesfarmers Limited (ASX: WES) is a retailer of outdoor living and home improvement products, general merchandise, office & technology products. It operates 4 key segments – Bunnings, Kmart Group (including the Kmart, Target and Catch businesses), Officeworks, Chemicals, Energy and Fertilisers, and Industrial and Safety. As on 1^st February 2021, the market capitalisation of the company stood at ~$61.91 billion. In a recent news update, the company announced that it would declare half-yearly results on 18^th February 2021. WES also announced appointment of Anil Sabharwal as one of the Directors on Board of Wesfarmers Limited from 1^st February 2021. In a trading update provided on 12^th November 2020, it reported costs related to COVID-19 of around $23 million for the period ending 31^st October 2020. The company reported considerable growth in demand in Bunnings, Officeworks and Catch businesses after the robust results recorded for 2H20. WES is experiencing robust trading performance across stores in Melbourne due to pent-up demand and re-opening of stores since 28 October 2020. The retail businesses of the Group posted total online sales growth of 166% for year to date, excluding Catch. The total online sales at the Group level increased to $1.3 billion inclusive of Catch for YTD20.

YTD20 Sales Results (Source: Company Reports)

Outlook: The company expects to bear $15 million per quarter costs while the threat of current pandemic persists. The chemicals’ division has started on a good note in 2H20 and company is optimistic about the demand for ammonium nitrate but the outlook for chemicals, energy, and fertilisers is driven by commodity prices and seasonal environment.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales 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 stock of WES gave a positive return of 101.61% in the past three months and a positive return of 104.91% in the past six months. The stock is currently inclined towards its 52-weeks’ high level of $55.75. The stock of WES has a support level of ~$54.099 and a resistance level of ~$55.68. We have valued the stock using EV/sales based multiple based illustrative relative valuation method and have arrived at a target price of low double digit-upside (in percentage terms). For the purpose, we have taken peers Woolworths Group Ltd (ASX: WOW), Super Retail Group Ltd (ASX: SUL), Metcash Ltd (ASX: MTS), etc. Considering the decent trading update till October 2020, surge in online sales and growth of Bunning, and other divisions, reduced financial debt, decent results of FY20, we give a ‘Hold’ rating to the stock at the current market price of $55.220, up by 1.117% on 1^st February 2021.

Treasury Wine Estates Limited

TWE Details

Imposition of Deposit Rate on Wine Imports to China: Treasury Wine Estates Limited (ASX: TWE) is involved in growing and sourcing of grape; and is a producer and distributor of wine in Australia and New Zealand. Beringer, Penfolds, Wolf Blass, Lindeman's, are a few of its key brands. As on 18^th December 2020, the market capitalization of the company stood at ~$7.25 billion. On 30 November 2020, TWE informed investors of a series of measures planned to minimize the impact of a provisional anti-dumping measure proposed by the Chinese Ministry of Commerce (MOFCOM) starting from 28 November 2020-28 August 2021. Basis completion of investigation on anti-dumping, Ministry will finalise its decision to levy of 169.3% charge on TWE’s value of wine imported in containers of 2 litres or less. China accounts for two-thirds (approx.30%) of the total earnings from Asia region for TWE. TWE distributes premium portfolio of luxury, masstige wines, and Rawson Retreat – its largest commercial brand by volume in China. The company foresees the measure to remain in place and will take 2-3 years to implement the planned measures to reduce the impact. It will release a market update on the status of the initiatives undertook so far in the release of 1H21 results.

Trading Highlights Q1FY21: During September 2020 quarter, the company witnessed progressive demand recovery in Asian markets month on month with portfolio units sold growing 14% in Q1FY21 vs the prior year. In the US, TWE registered 12% growth in portfolio value for Q1FY21 owing to robust increase in retail channels. The US market saw 5% growth in depletions for the quarter spanning all channels and in Australia, trading conditions were in sync with the guidance posted for FY20. The share of total portfolio is weighted towards masstige and lower luxury brands and the masstige portfolio rose by 21% in Q1FY21 and ahead of the market.  

FY20 Annual Highlights: The revenue from the ordinary activities fell by 7.1% from $2,883 million in FY19 to $2,678 million in FY20. TWE posted Net Sales Revenue (NSR) of $81.9 for FY20 vs $79.8 in FY19. It distributed dividend of $28 cents per share for FY20 and targets a dividend payout of 55-70% of NPAT over the next fiscal year vs current 64% in FY20.

Financial Highlights FY16-FY20 (Source: Company Reports)

Outlook: TWE plans to improve on its trading performance, execute structural changes in the US and implement measures to mitigate the adverse impact of MOFCOM’s investigation. TWE has halted the potential demerger of Penfolds brand to consider internal opportunities for a value generating operating model through a distinct portfolio review across brands. The company plans to reach a Group EBITS margin target of 25% with regional growth focus and EBIT margin target for Asia, US, ANZ and EMEA, respectively.

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

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

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of TWE gave a positive return of 6.71% in the past three months and a negative return of 8.19% in the past six months. The stock is currently inclined towards its 52-weeks’ low level of $7.87. The stock of TWE has a support level of ~$9.411 and a resistance level of ~$10.526.  

We have valued the stock using Price to Earnings based illustrative relative valuation method and have arrived at a target price with an upside of low double-digit (in % terms). For the purpose, we have used Coca-Cola Amatil Limited (ASX: CCL), Coles Group Ltd (ASX: COL), Woolworths Group Ltd (ASX: WOW), etc. Considering the current trading levels, recovery of demand across TWE’s markets in Asia & China, EMEA, growth of portfolio in Q1 in all key markets, rise in NPAT from FY16-FY19, decent outlook for FY21 and valuation, we recommend a ‘Buy’ rating to the stock at the current market price of $9.860, down by 1.891% on 1^st February 2021.

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

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