Wesfarmers Limited

Update for Shareholders: Wesfarmers Limited (ASX: WES) is a large-cap company with the market capitalisation of ~A$44.1 Bn as of 24th July 2019. Recently, WES released a report which provides information on the trading and operations update of Kidman. Kidman has now been anticipating cash outflow of around $1.4 Mn in the quarter ended June 2019, and a cash balance at the end of the quarter of around $25.6 million in comparison to previous guidance of cash outflow of around $11.3 million, and cash balance of $15.8 million. With respect to Kidman’s previous announcement in relation to Scheme Implementation Deed with Wesfarmers Limited, it is currently expected that a scheme Booklet would be sent to shareholders of Kidman in the early August, and that Kidman shareholders would be meeting to vote on the Scheme in early September 2019.

The company stated that it delivered long term earnings growth via growth of the existing businesses & portfolio management. It has a portfolio of cash-generative businesses with strong returns on capital.The capital expenditure of the company is focused on strengthening core businesses & driving long-term investment returns. The company continued investments in digital transformation throughout the group.


Divisional EBIT and RoC (Source: Company Reports)

What to Expect:The company is expecting a significant runway in home, lifestyle & commercial market. It is expecting good momentum and opportunities throughout Australian and New Zealand. It is focused on growing digital and physical presence. The company has a strong pipeline and plans for 10 net new stores p.a. Wesfarmers Limited is investing for sustained growth. It has a strong focus on disciplined execution & cost control.

Stock Recommendation:The company reported a gross margin and EBITDA margin of 38.4% and 12.2% in 1H FY19 in comparison to the industry median of 55.5% and 29.4%, respectively. It posted a net margin of 7.5% in 1H FY19, reflecting YoY growth of 2.6%. This implies that the company is effectively converting its top-line into the bottom-line. The company delivered a return on equity of 6.3%, reflecting the growth of 3.4% on YoY basis. This indicates that the company is improving in terms of providing returns to shareholders.

Coming to the stock’s past performance, it produced returns of 6.78% and 9.21% in the time span of one month and three months, respectively. As per ASX, the stock of Wesfarmers Limited is trading closer towards its 52-week higher levels and, thus, it looks like that the stock might witness some sort of correction in the near term. Hence, considering the above-stated facts and current trading levels, we give an “Expensive” rating on the stock at the current market price of A$39.300 per share (up 1.054% on 24^th July 2019).

Coles Group Limited

Refreshed Strategies of COL:Coles Group Limited (ASX: COL) is a retailer of products such as fresh food, groceries, household goods, etc. The market capitalisation of the company stood at ~A$18.45 Bn as on 24^th July 2019. The company’s refreshed strategy revolves around sustainably feeding all Australians and to create long term shareholder value. Additionally, the refreshed strategies are based on three pillars, i.e., (1) Inspiring customers via best value food and drink solutions to make lives easier, (2) Smarter Selling through efficiency and pace of change,and (3) Win together with the team members, suppliers as well as communities.The company operates in resilient and growing markets. It has a market-leading position in an evolving competitive landscape. Additionally, the company has a strong cash position to fund growth and innovation while maintaining an attractive dividend payout ratio in the range of 80-90% of its earnings. The company’s strategic differentiators primarily include winning in online food and drinks with an optimised store and supply chain network. The following picture provides an overview of the performance on Q3 FY 2019:


Financial Summary (Source: Company Reports)

Future Prospects: It is expecting revenue growth to be at least in accordance with market growth over the long term. It is expecting around $1bn of cumulative cost savings by FY23. In addition, it is also planning to maintain an attractive dividend payout ratio. The company is anticipating comparable Supermarket sales growth for Q4 FY19 to be in the upper half of the range between Q2 and Q3 comparable growth, adjustedfor New Year’s Eve. The company is expecting net capital expenditure for FY 2019 in the range of $700 Mn-$800 Mn.

Stock Recommendation: It posted a current ratio of 0.74x in 1H FY19, reflecting the growth of 20.4% on YoY basis. This indicates that the company is improving its position to meet its short-term obligations. Additionally, it might support the company in making deployments towards strategic business objectives.
 

The return on equity stood at 13.6% in 1H FY19 in comparison to the industry median of 5.8%, which represents that the company is providing better returns to the shareholders in comparison to the broader industry.With respect to the stock’s past performance, it generated returns of 5.49% and 11.08% in the time span of one month and three months, respectively. Hence, considering the above-stated facts and decent outlook, we give a “Buy” recommendation on the stock at the current market price of A$13.980 per share (up 1.085% on 24^th July 2019), ahead of its Quarterly and full-year results which is to be released on 22 August 2019.
 

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