Stocks’ Details

Coles Group Limited

Coles Re-enters the Australian Debt Capital Markets: Coles Group Limited (ASX: COL) is an Australian retailer of products such as fresh food, groceries, household goods, liquor, fuel, and financial services via stores and online. As on 2 September 2020, the market capitalization of the company stood at ~$23.34 billion. The company has recently announced that its subsidiary, Coles Group Treasury Pty Ltd has priced $450 million of Australian dollar medium-term notes. This demonstrates confidence in the balance sheet and will allow COL to diversify its sources of funding and extend the average maturity of its debt facilities.  

FY20 Results: During FY20, the company delivered on its first-year strategy and reported an increase of 6.9% in total sales revenue to $37.4 billion and an increase of 4.7% in EBIT to $1,387 million. In the same time span, the company reported a net financial debt of $362 million and operating cash flow of $2,240 million. The decent financial and operational performance enabled the Board to declare a dividend of 27.5 cents per share, taking the full-year dividend to 57.5 cents per share. The company will pay this dividend on 29 September 2020.

FY20 Financial Highlights (Source: Company Reports)

Outlook: The company is expecting higher corporate costs, driven by a market-wide increase in insurance costs. It also expects modest net earnings from property operations, weighted towards the first half due to lower anticipated disposal activity. It plans to renew ~65 stores and open 15 to 20 new stores in FY21.

Key Risks: The company is exposed to a variety of risks including the risks related to the COVID-19 pandemic, high customer uncertainty, risks related to the government regulations and policy response, border closures, variations in restrictions between states and countries, and disruption in international and domestic supply.

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

Stock Recommendation: The company returned to full-year Group EBIT growth for the first time in four years, increasing by 4.7%. It has a largely fixed cost base and headroom for growth in the online channel. As per ASX, the stock of COL gave a return of 19.29% in the past six months and a return of 13.05% in the past three months. The stock is inclined towards its 52-weeks’ high level of $19.260. On a technical analysis front, the stock of COL has a support level of ~$15.83 and a resistance level of ~$19.013. We have valued the stock using the P/CF multiple based illustrative relative valuation and have arrived at a target price of single-digit upside (in percentage terms). For the said purposes, we have considered Wesfarmers Ltd (ASX: WES), Woolworths Group Ltd (ASX: WOW), Metcash Ltd (ASX: MTS), etc., as peers. Considering the current trading levels, decent returns in the past three months, positive long-term outlook, and key risks, we recommend a ‘Hold’ rating on the stock at the current market price of $17.68, up by 1.029% on 2 September 2020.

Coca-Cola Amatil Limited

1H20 Financial Highlights: Coca-Cola Amatil Limited (ASX: CCL) is engaged in the manufacturing, distribution, and marketing of beverages. As on 2 September 2020, the market capitalization of the company stood at ~$6.52 billion. During 1H20, the company reported a decline of 9.2% in revenue to $2,185.9 million, driven by the impacts of COVID-19 across all its markets. In the same time span, EBITDA of the company stood at $370.5 million, reflecting volume impact on margins, partially offset by cost savings and NPAT of the company was $112.1 million supported by lower finance costs and a lower effective tax rate. During the half-year, the company generated strong cash and reduced its net debt by $49.9 million since June 2019. The company declared an unfranked interim dividend of 9 cents per share, which will be paid on 13 October 2020. This signifies the confidence of the Board in the strength of the business.

1H20 Financial Highlights (Source: Company Reports)

Outlook: The company is prioritizing to maintain its operational agility and supporting its customers and remains confident in its long-term outlook. It is focused on its business continuity by dynamic and conservative scenario planning. It has gained a good market share in Australia and New Zealand and is working on strengthening its trademark and energy brands.

Key Risks: The company is exposed to a variety of risk factors including the risks from the global pandemic and its subsequent impacts, liquidity risks, credit risks, risks related to its derivatives portfolio, disruption in supply chains, climate risks, etc.

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

EV/EBITDA 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 business of CCL is slowly recovering and is gaining momentum. It has strengthened its balance sheet with the reduction in net debt and has seen an increase in online grocery shopping and higher demand of no Sugar/Diet Colas and Diets/Lights Flavors. As per ASX, the stock of CCL is trading close to its 52-weeks’ low of $7.770, proffering a decent opportunity for accumulation. On the technical analysis front, the stock of CCL has a support level of ~$8.094 and a resistance level of ~$11.541. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target upside of low double-digit (in % terms). Considering the current trading levels, modest long-term outlook, resilient business model and stability in balance sheet, we recommend a ‘Buy’ rating on the stock at the current market price of $9.080, up by 0.889% on 2 September 2020.

Metcash Limited

Completion of Total Tools Acquisition: Metcash Limited (ASX: MTS) is a wholesaler to independent retailers in food, grocery, liquor, hardware, and automotive industries. As on 2 September 2020, the market capitalization of the company stood at ~$2.91 billion. The company has recently completed the acquisition of a 70% interest in Total Tools Holdings Pty Limited for a purchase price of ~$57 million. The acquisition includes a clear structure for MTS to acquire the remaining stake of 30% in Total Tools by early 2024.

FY20 Financial Highlights: During FY20, group revenue increased by 2.9% to $13.0 billion. This was mainly due to sales growth in food deliverables and positive uplift in sales due to COVID-19. In the same time span, underlying group EBIT was $324.2 million and underlying profit after tax was broadly in line with the prior year at $209.7 million. The company has strengthened its financial position through equity raising and secured an additional short-term debt facility of $180 million in response to the high level of uncertainty associated with COVID-19. The Board declared a final fully franked dividend of 6.5 cents per share, taking the total dividend to 12.5 cents per share.

Financial Highlights (Source: Company Reports)

Outlook: MTS has benefitted from the change in consumer behavior and saw a growth of 11.4% in total sales in the first quarter of FY21. The Liquor segment continued to perform well, and sales for the hardware segment increased by 19.2%.

Key Risks: The company is exposed to a variety of risks including physical and transitional risks, climate change risk, increase in costs to service, disruption in supply chain and distribution network, reduced availability and quality of fresh products, and decrease in the availability of timber products due to the impact of bushfires.

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: Despite the significant trading and volatility in the trading environment, the company is offering significant value creation opportunities and synergies. It seems to be well-positioned for further growth and is focusing on improving the competitiveness of the retailer network. As per ASX, the stock of MTS is inclined towards its 52-weeks’ high of $3.470. On the technical analysis front, the stock of MTS has a support level of ~$2.686 and a resistance level of ~$3.076. We have valued the stock using the P/E multiple based illustrative relative valuation method and have arrived at a target upside of low double-digit (in % terms). Considering the current trading levels, decent financial performance, and the acquisition of Total Tools, we recommend a ‘Hold’ rating on the stock at the current market price of $2.94, up by 3.158% on 2 September 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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