Stocks’ Details

Woolworths Group Limited

Stable performance with focus on core business: Woolworths Group Limited (ASX: WOW) offers retail operations. The Company operates general merchandise consumer stores and supermarkets. Recently, the company has entered into a pact with the EG Group to sell 540 Woolworth-owned fuel convenience sites to EG group for the consideration of A$1.725 Bn. This transaction has been entered so as to add the customer value when they shop with Woolworth in the form of fuel rewards. Only after the transaction gets completed in early 2019, the company would be able to disclose the usage of the proceeds received from it. The firm reported its first-quarter sales numbers ended 30 September 2018, sales from continuing operations came in at $ 14,853 Mn, up by 1.9% on Q-o-Q basis. It was mainly driven by the sales growth of 3% in Endeavour Drinks and a positive sales growth of 2.6% in New Zealand food business during the quarter. Also, the online presence saw a growth of 28% over the same period, however, the removal of single-use plastic bags & a competitor continuity program had an offsetting impact on sales. The average prices saw a decline of 1%, as the fruits & vegetable prices remained flat during the quarter.

For the FY ended 2018 the Sales (Continuing operations) grew by 3.4% to reach at $56.7 Bn, this was mainly on account of strong sale growth which was witnessed in the Australian Food & Endeavour Drinks of 4.3% and 4.5% on PCP. The company declared a total dividend of 103 cps for FY 2018, on account of the improving trading performance, balance sheet strength & new petrol alliance.

Although, the company has faced initial hiccups for the 1Q 2019 as the comparable sales slowed to 1.3% due to the deflation in the fruits & vegetables as well as the competitor continuity program, it is expected that the sales momentum will improve on account of the robust sales momentum being enjoyed by the New Zealand food.Also, the Endeavour drink will further be able to consolidate its position in the market given the enhancement of its digital & data capabilities. Further, the Big W is also expected to cut down on its losses & its revenue will be driven by the Christmas sales period.


Key Balance Sheet Metrics (Source: Company Reports)
 
Meanwhile, the share price has remained flat by rising a mere 0.59% in the past three months (as of November 22, 2018) and traded at PE multiple of 21.77x. Currently, it has a market capitalization of $38.03 billion while its annual dividend yield stood at 3.22%. Considering its regime to focus on its core business and stable performance in spite of deflation and severe competition prevailing in the grocery industry, we maintain our “Hold” recommendation on the stock at the current market price of $28.910.
 

Coles Group Limited

Intensifying competition & falling EBIT margins: Coles Group Limited (ASX: COL) operates retail stores, including supermarkets, department stores, apparel shops, liquor stores, office supplies and discount stores located throughout Australia and New Zealand. The Company also operates an online retail website along with investment property holdings. In the recent release on ASX, the company has been admitted to quoting officially on ASX from 21 November 2018 on deferred settlement basis, however the same will commence trading on a normal basis from 28 November 2018. On the other hand, the sales for the FY 2018 was recorded at $ 39,288 Mn, hence revenues almost remain flat as compared to the prior year. This was on the back of higher Coles supermarket & Coles liquor revenue but offset by the lower Coles convenience sales. EBIT fell by around 7.1% to reach at $1,414 Mn on account of softer sales, rising operating and transferred costs caused by the Demerger from Wesfarmers, and deconsolidation of the 100 per cent economic interest in flybuys. In addition to this, the Cole Convenience earnings declined due to an increase in the wholesale cost of fuel, which translated into lower margins.

Given the backdrop of recent results, we presume that the core business of the company is still operationally sound. While, EBIT margin has fallen by 20 Bps to 3.8% in FY 2018, which was on account of intense competition in the Australian Supermarket Sector. With no prospects of competition subsiding in the near future and moreover the introduction of new entrants, we expect the company to achieve only moderate growth in the coming future.


(Source: Company Reports)

By Looking at the intensifying competition in the Australian supermarket sector, and falling EBIT margins, we therefore, give a wait and watch view on COL at the current price levels of $12.690.
 

Wesfarmers Limited

Falling NPAT & Subdued Stock Performance: Wesfarmers Ltd. (ASX: WES) owns retail chains, operates mines, writes insurance, manufactures and distributes industrial products, manufactures fertilizers and chemicals, and distributes liquefied petroleum gas and medical and industrial gases. Recently, the company posted Q1FY19 performance wherein sales grew by 5.8% reached $7,657 Mn, which was driven by the impactful ‘Coles little shop’ campaign, in-store execution improvements and fly-buys promotional campaigns. All these initiatives have led to a strong growth in the basket size, transaction numbers and ultimately the units sold. However, this growth was offset by a subdued Convenience business due to difficult trading conditions coupled with high global oil prices which impacted the volumes as well as margins. The ongoing changes in the commercial terms with the Alliance partners also contributed to the same.

For the FY 2018, the NPAT attributable to members fell by 58.3% on PCP to reach $1,200 Mn due to the impairment charges and disposal costs associated with the UK and Ireland business along with a further impairment in the target business. The firm has declared a fully franked dividend $1.20 per share, amounting to a full year dividend of $2.23 per share.

In another release on ASX, the company disclosed that the Supreme Court of Western Australia approved the scheme of arrangement for the demerger of Coles Group Limited from Wesfarmers. With the effect of the demerger scheme, Coles is expected to commence trading on ASX on 28 November 2018, on the normal trading basis.


Debt Maturity Profile (Source: Company Reports)
Meanwhile, the share price has fallen 33.08% in the past one month. Moreover, considering its plunging NPAT and fierce competition in the Australian Supermarket sector, thus, the scrip can be avoided at the current market price of $31.320.
 

Accent Group Ltd

Strong growth in Top-line: Accent Group Ltd (ASX: AX1) distributes and markets footwear and apparel. The Company offers a wide range of sneakers, athlete footwear, and work boots. Accent Group serves customers in Australia. For FY 2018 the company has achieved a total owned sale of $676 Mn, which is up 9.3% on a Y-O-Y basis. This expansion was on the back of an exceptional digital sales growth of 131% and the opening of 31 new stores. EBITDA for the year was clocked at $90.8 Mn, up 16% on a Y-o-Y basis this was on account of its sustainable Top- line growth and margin expansion, resulting due to vertical brands penetration and the strategy to reduce the discount-driven retailing compared to previous year.
 
Going forth, the company expects to open more than 30 new Australian stores in FY 2019 & 30-40 new store in New Zealand in the next 2-3 years which will again boost its top line. Also, there would be new product launches and hence increased penetration could be seen in the vertically distributed brands. The company will also focus on its organic expansion through its Platypus brand.

The company is trading at an attractive TTM P/E multiple of around 13.61 times. Also, the company’s dividend yield stands at 6.03% which indicates that the firm is generating healthy cash flows & expects to have stable earnings in the future.
 

Underlying EBITDA Trend (Source: Company Reports)
 
If we look at the YTD performance, the stock has given substantial returns of 33.33 %. Considering strong stock performance in the long run and expected strong sales growth, we maintain our “Hold” recommendation on the stock at the current market price of $1.105.
 

Super Retail Group Limited

Strong segmental growth & expanding online presence: Super Retail Group Limited (ASX: SUL) operates a chain of retail stores throughout Australia. The Stores sells a wide range of automotive parts and accessories, tools, camping products, gardening and outdoor equipment and boating equipment throughout Australia and New Zealand.

The company via the ASX released the trading update for the 16 weeks ended 20 October 2018, where it stated that the all of its four business segments are performing well, in particular, its ‘MacPac’ segment witnessed a like for like growth of 8.4%. The integration of Rays business into ‘MacPac’ is continuing as decided and hence the transition of Rays stores into ‘MacPac’ stores shall be smooth. 

Going forth, the company will be focussing on its new digital platform to provide a more engaging & a comprehensive online offer to the customers.
 
For FY 2018, the group recorded a sale of $2.57 Bn, a growth of 4.2% on PCP. This was on the back of increased customer transaction which grew by 2.5% to reach 45.6 Mn. Moreover, the company saw growing traction towards its online platform leading to an online sales growth of 152% and 85% in the sports and auto segments, respectively. Normalized EBIT grew by 5.9% on PCP to reach at $219.6 Mn. This was on the back of improvements in the working capital management via improved supply chain efficiencies and growing trade partner payment terms. The company has declared a fully franked final dividend of 27.5 cents, summing up the total dividend to 49 cps fully franked backed by strong financial performance and effective capital management.

 

 
SUL’s Total Shareholder’s Return Trends (Source: Company Reports)

Going forth, the company will concentrate on enhancing its market share to sustain its position in Australia a leading retail chain. Macpac enjoys a leadership position and the growth witnessed in it is superior to the nominal retail growth. Further, the company will review its all core business processes in order to optimize its costs in the face of increasingly competitive Retail sector market & thus has started its “Competitive organisation” program to look after this work. If we look at the past six month’s performance, the stock has receded of 17.05% as on 21 November 2018. However, considering strong segmental performance and expanding online presence, we maintain our “Hold” recommendation on the stock at the current market price of $6.950.
 

 
 
 Stock Price Comparative Chart (Source: Thomson Reuters)
 

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