Are the supermarkets still a buy ?

Metcash (Hold)

The shares of Metcash Limited (ASX: MTS) crashed over 20.8% on June 4^th, on reports of cautious earnings forecast in the coming months as well as no final dividend for fiscal year 2015, which means that the dividends will also be suspended for fiscal year 2016 as well. The group decreased the carrying value of goodwill and other assets by a whopping amount of $640 million, resulting in the firm’s impairments of net assets to be over $1.15 billion.

On the other hand, the group recently announced a better than expected revenue year over year increase of 1.7% to $13,626.2 million for the fiscal year of 2015. However, the firm’s underlying EBIT plunged 16.7% to $325.1 million, as compared to $390.3 million in fiscal year 2014. In addition, earnings per share slumped to 21.3 cents from 26.5 cents in fiscal year 2014.

Moreover, Metcash is seeking to improve its balance sheet from the proceeds of its loss making Metcash automotive holdings. Burson group acquired this division for $275 million, and the company expects to get $210 million after tax.


 Pro-forma impact on funds and group profit & loss (Source: Company Reports)

Metcash is also making efforts to transform into a consumer focused wholesaler by offering competitive prices, fresh food and private label products, improving marketing competencies, price promotions and innovation. Despite the recent correction, we believe that the company’s strategy efforts and recent capital proceeds can offer some respite to the stock in the coming months. Accordingly, we give a “HOLD” recommendation to the stock at its current price of $1.045.
 
Woolworths (Hold)

Woolworths Limited (ASX: WOW) Australian food and liquor business continue to face pressure in April, May and June. The food and liquor business in Australia reported a year over year decrease of around 0.7% in Easter adjusted comparable sales from Q415 to date (till June 14^th, 2015). The new merchandising system launch has led to the stock availability issues in the group’s stores. Therefore the general merchandising Easter adjusted comparable sales slumped over 12.1% during Q415 to date (till June 14^th, 2015).

Meanwhile, the home improvement Easter adjusted revenue rose 19.8% during Q415 to date (till June 14^th, 2015). This increase was driven by home timber and hardware reporting increase of over 21.9% as well as masters’ segment improvement by 17.7%. The group estimates over 20% growth of its network trading in the new format for masters (which the firm announced during last year august) by the end of fiscal year 2015. The group reported that the performance of its other divisions are broadly on track with its expectations.


WOW Daily Chart (Source - Thomson Reuters)

On the other hand the company is going through a rapid strategic change to keep up with the intensifying competition in Australian supermarket sector and cover its declining sales. The firm already hinted that several significant items would be reflected under non-recurring costs in its fiscal year 2015 results. The group intends to achieve $500 million of cost saving for fiscal year 2015 and 2016, as well as work towards improving its sales in Australian food segment by reinvesting in price and deliver value to customers. The firm is also cutting workforce of over 1,200 people from support functions, supply chain and non-customer facing store operations. Consequently, the firm expects a redundancy costs in the range of $40 million to $50 million related to workforce changes. 


New initiatives (Source: Company Reports)
 
As a result of the group’s initiatives, the net profit after tax before significant items is estimated to be over $2.45 billion for fiscal year 2015, in line with last year. Net profit after tax post significant items is expected to be over $2.15 billion. We believe that Woolworths change in strategy would take considerable time for the stock to deliver long term performance, and accordingly recommend a “HOLD” on the stock at the current price of $27.12
 
Wesfarmers (Expensive)

Wesfarmers Ltd (ASX: WES) grocery division Coles has reported a modest year to date revenue gains of 2.1% to $28.5 billion, as compared to $27.9 billion in the corresponding period of previous year. The total home improvement & office supplies segment revenues witnessed a year over year increase of 11.4% to $8.58 billion boosted by the firm’s every channel strategy execution. Kmart delivered a decent performance of posting year over year increase by 6.8% to $3.43 billion, driven by new space and improved core products performances. Meanwhile, Target continued to be under pressure declining 1.7% to $2.6 billion, as compared to $2.7 billion due to higher deflation.  


Divisional EBIT (Source: Company Reports)
 
On the other hand, Coles and Woolworths dominate the grocery market in Australia, representing over 60% market share, based on the recent Moody’s report. However the aggressive measures by Coles competitors like Aldi have raised concerns on the group’s performance in the coming months. Even though Coles compromises on its prices to keep up with its competition, the firm’s profitability might become a concern. Moreover, the shares of Wesfarmers fell 9.1% in the last fifty two weeks, against the broad index S&P/ASX 200 decline of 1%. Despite the decline in the stock we believe the stock is trading at higher valuations with P/E of 26.34, much higher as compared to its peers. Accordingly, we continue to stand on our “SELL” recommendation on the stock at the current price of  $39.67.
 
 

---

 Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people.Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation.Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product.The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
Copyright
Copyright © 2014 Kalkine Pty Ltd ABN 34 154 808 312. No part of this website, or its content, may be reproduced in any form without the prior consent of Kalkine Pty Ltd.
Kalkine is a trading name of Kalkine Pty Ltd ABN 34 154 808 312, which holds Australian Financial Services Licence No. 425376.