Coles Group Limited

COL Details
 
H1FY20 Comparable Sales Grew by 2% on y-o-y: Coles Group Limited (ASX: COL) is an Australia based retail company, which provides products such as fresh food, groceries, household goods, liquor, fuel and financial services via stores and online.

H1FY20 Trading Update for the Period ended 5 January 2020: COL announced its half-yearly trading update, wherein the company reported comparable sales growth of 2% from H1FY19. The company reported comparable sales growth of 1.5% and 2.9% across the Liquor and Express (c-store) segments. The company highlighted that its first-half provisional EBIT was impacted by an expense of $15 million self-insurance allocated for the workers compensation in order to improve safety performance. The earnings of the company include a net gain from property disposals which signifies the vast majority of the expected FY20 property earnings. Supermarkets EBIT growth was majorly driven by the increased costs gained due to the elimination of plastic bags and higher flybuys promotions. However, the cycling of the prior year incremental costs is expected not to be included from the H2FY20 onwards. The quarter witnessed satisfactory revenue growth within the Liquor segment, however, the EBIT of the above segment is likely to come lower due to the margin erosion on account of stock clearance and increased promotional activity following the commencement of strategic range reviews.

Q1FY20 Highlights for the Period ended 29 September 2019: COL announced its quarterly results, wherein the company reported its revenue of $8,695 million, up 1.8% on a y-o-y basis.  Comparable sales growth in Liquor and Express came in at 2.1% and 5.1%, respectively. Comparable sales from the supermarkets grew 0.1% in Q1FY19, beating the strong sales achieved in the prior corresponding period. During the quarter, the business made investments across the best value food and drink solutions by lowering the cost of breakfast, lunch and dinner with a focus on meal solutions and Own Brand fresh products. The company has helped dairy farmers by moving to direct sourcing of milk from farmers in Victoria and Southern and Central NSW, registering  certainty of future income. The company also emphasised on improving its own brand value with new product-line such as ‘Mum’s Sause’ which has helped sick children in hospitals across Australia.


Q1FY20 Trading Highlights (Source: Company Reports)

Valuation Methodology: Price to Cash Flow Based Valuation

P/CF Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM: Next Twelve Months
 
Stock Recommendation:The stock of COL is quoting at $16.63 with a market capitalisation of $22.21 billion. The stock is trading at the upper band of its 52-week trading range of $11.026 to $17.02. The business is focused on its refreshed strategy which has delivered a positive set of results for the first quarter of FY20. Higher sales growth indicates improved product acceptability by the end consumers, while confirms the sustainability of the new product-line. The company’s revenue from own brand grew by 4.7% during the first quarter with penetration at 30%. New products and effective promotion campaigns made a positive contribution to the growth in sales revenue.Considering the current trading levels, and business prospects, we have valued the stock using Price to cash flow based relative valuation method and arrived at a target price of higher single-digit upside (in % terms). Hence,  we recommend a “Hold” rating on the stock at the current market price of $16.63 per share, down 0.12% on 06 February 2020.
 
 
COL Daily Price Chart (Source: Thomson Reuters)

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