Wesfarmers Limited

Major Restructuring in Wesfarmers Business:Wesfarmers Limited (ASX: WES) is engaged in the business of diversified industrials, which includes retail operations covering home improvement and office supplies, gas processing and distribution, general merchandise and specialty departments stores, industrial and safety product distribution and chemicals and fertilisers. Market capitalisation of the company stood at $46.39 billion on 9^th December 2019.

2019 was an important year for WES as the company went through major business restructuring.The company demerged its Coles business from the group and sold its interest to the Kmart Tyre and Auto Service (KTAS) business and the Bengalla coal mine. WES reported a net profit after tax of $5.5 billion. Out of this total, $3.2 billion was attributable to the significant items arising from Coles demerger and profits on a sale of Bengalla, KTAS as well as Quadrant Energy.

Also, the company declared a fully franked final dividend of 78 cents per share, which brings the full-year dividend to $1.78 per share.If we include a special dividend of $1.00 per share, which was paid in April 2019, it brings the total fully franked dividends to $2.78 per share.


Financial Overview (Source: Company Reports)

Outlook: In the recent months, Wesfarmers Limited saw a modest improvement in retail conditions with indications of improved consumer confidence, buoyed by a recovery in residential property prices and benefit to households from a reduction in interest rates and tax. The company is confident about the outlook and has the belief that the investments they are making in the customer offer and new growth platforms will deliver value to shareholders.

Valuation Methodology: EV to Sales Multiple Approach

EV/Sales based Valuation (Source: Thomson Reuters), *NTM: Next Twelve Months

Stock Recommendation: As per ASX, the company’s stock is trading near its 52-week high and has given a total return of 3.46% and 7.77% in the time period of three months and six months, respectively. The company’s EBITDA margin stood at 11.3% in FY19, which is below the industry median of 29.6%. The company’s ROE stood at 11.9% in FY19, which is below the industry median of 24.2%. Wesfarmers Limited is going to release its half-yearly 2020 report in February 2020, which might provide more details on the outlook of the company. We have valued the stock using EV/Sales Multiple Approach and arrived at a target price, which is offering a downside of lower single digit (in percentage terms). Based on its current trading position, half-yearly earnings release and EV/Sales Multiple based valuation, we have a watch stance on the stock at the current price of $40.830 per share, down by 0.196% on 9^th December 2019.
 

Coles Group Limited

Coles Delivers Solid Performance Despite Certain Headwinds:Coles Group Limited (ASX: COL) is an Australian retailer of products such as groceries, fresh food, liquor, fuel, household goods and financial services through stores and online. The market capitalisation of the company stood at ~$20.36 billion on 9^th December 2019. The company reported solid results for FY19 despite facing headwinds like increasing competition and higher costs that were being felt across the retail sector. The company reported statutory revenue of $38.176 billion, down 1.9% and EBIT of $1.467 billion, down 0.9%. On the retail basis, the revenues of $35 billion, up 3.1%. This number excludes significant items as well as fuel sales and hotels. 

The biggest contributor to Coles’ revenue and earnings, Supermarkets, maintained to show resilience in the competitive market, increasing sales by 3.2% with total revenue of $30.89 billion for the year on a retail basis. Coles Group Limited declared a fully franked dividend of 35.5 cents per share. However, 24 cents per share of final dividend for the second half of the financial year and 11.5 cents per share as a special dividend.

Sales Revenue Increased by 1.8% in Q1FY20: The company reported first-quarter sales of $8.7 billion, an increase of 1.8%. Supermarkets segment registered comparable sales growth of 0.1% in the first quarter, surpassing the strong sales achieved in the pcp.Liquor segment delivered comparable sales growth of 0.7%, with a strong performance in First Choice.


First Quarter Sales (Source: Company Reports)

Valuation Methodology: EV to EBITDA Multiple Approach

EV/EBITDA based Valuation (Source: Thomson Reuters), *NTM: Next Twelve Months

Stock Recommendation: The company’s net margin stood at 2.8% in FY19, which is above the industry median of 2.0%. Also, in the last two years, the company has improved its net margins and its FY 2018 figure was 2.6%. As per ASX, the stock is trading above the average of its 52-week high and low. We valued the stock using EV/EBITDA Multiple based relative valuation and, as a result, the target price provided an upside of lower single-digit (in percentage terms). Based on the stock’s current trading position, growth in net margin and valuation, we have a “Hold” rating on the stock at the current price of $15.300 per share, up by 0.262% on 9^th December 2019.
 

Woolworths Group Limited

Woolworths Appoints Chairman-elect for Endeavour Group:Woolworths Group Limited (ASX: WOW) is engaged in the business of general merchandise, food and speciality retailing through chain store operations. The company primarily operates in Australia and New Zealand, with 3,292 stores at the year-end. The market capitalisation of the company stood at ~$48.38 billion on 9^th December 2019.

Woolworths Group has appointed Peter Hearl as the proposedChairman-elect of Endeavour Group.He is an experienced ASX 50 Director and the global leader in the hospitality and food & beverage sector. Currently, Peter is a Non-Executive Director of Telstra Limited and Santos Limited, and previously he was Non-Executive Director of Treasury Wine Estate Ltd and Goodman Fielder Ltd.

Proposed Class action Filed Against WOW: A Canberra law firm has announced its intention to file an employee class action proceeding against the company in the Federal Court of Australia.This class action is related to the payment shortfalls to the company’s salaried store team members covered by the General Retail Industry Award. The company expects that the one-off influence for remediation is expected to be between $200-300 million (before tax). 
Strong Sales Growth in Q1: The company reported Australian Food sales growth of 7.8%, driven by successful Lion King Ooshies and Woolworths Discovery Garden campaigns and Online.The New Zealand Food sales delivered growth of 4.6%, with customer metrics continuing to improve. Group Online sales were up by 37.4%, driven by WooliesX and CountdownX.

 

First Quarter Sales (Source: Company Reports)

What to Expect from WOW: The sales momentum across the company has improved in 2HFY19, and this sales momentum has been carried into FY20.Though, the consumer environment remains uncertain as customers are experiencing the cost of living pressures despite low-interest rates and recent tax stimulus. Despite all these headwinds, the company is optimistic on the material opportunities the company has across the group in order to deliver value for customers and shareholders in FY 2020.

Valuation Methodology: EV to EBITDA Multiple Approach

EV/EBITDA Valuation Approach (Source: Thomson Reuters), *NTM: Next Twelve Months

Stock Recommendation: Over the period of FY15 to FY19, the company has registered a CAGR of 5.84% in the net income. Its gross margins stood at 29.1% in FY19, which is above the industry median of 26.2%. The company’s EBITDA margin stood at 6.3% in FY19, which is above the industry median of 5.8%. We have valued the stock using EV/EBITDA Multiple Approach and arrived at a target price of lower single-digit (in percentage terms). Based on its strong margins, trading position and EV/EBITDA Multiple based valuation, we have a “Hold” rating on the stock at the current price of $38.280 per share, down by 0.209% on 9^th December 2019.
 

The a2 Milk Company Limited

CEO Resigns from Its Position:The a2 Milk Company Limited (ASX: A2M) is a premium branded dairy nutritional company, primarily focussed on products containing the A2 beta-casein protein type. The market capitalisation of the company stood at ~$10.7 billion on 9^th December 2019.

The a2 Milk Company Limited has announced that the Managing Director & CEO of the company, Jayne Hrdlicka, has agreed to resign from its current position.For the meantime, the company has appointed Managing Director Geoffrey Babidge as the interim CEO. The company will start an international search for a full-time CEO and is planning to make an appointment before the end of FY20. 


Key Financial Highlights (Source: Company Reports)

A2M Reaffirms FY20 Guidance: For FY20, the company expects strong revenue growth across key regions, which is consistent with its plan and is also supported by major brand and marketing investment. The company’s EBITDA margin % in 1H FY 2020 is anticipated to be in the range of 31-32%, while FY 2020 EBITDA margin is expected to be between 29- 30%.

Stock Recommendation: Over the period of FY15-FY19, the company’s revenue has registered a decent CAGR of 70.37% in the revenues. Its net income has also grown by 111.52% CAGR in the last three years (FY16 to FY19). The company has a ROE of 42.8% in FY19, which is above the industry average of 12.9%. Based on the foregoing and the update related to the resignation of the company’s MD and CEO, we give a “Hold” recommendation on the stock at the current market price of A$13.970 per share, down 3.92% on December 9, 2019. 
 
 
Comparative Daily Price Chart (Source: Thomson Reuters)

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