Woolworths Group Limited

WOW Details

Decent Growth in Online Sales: Woolworths Group Limited (ASX: WOW) is involved in food, general merchandise, and specialty retailing via chain store operations. The market capitalisation of the company stood at ~$48.86 billion as on 3^rd August 2020. Recently, the company informed that its venture capital arm W23 has converted its $2.95 million Convertible Bond into 5.9 million CHESS Depository Interests in Marley Spoon. However, venture capital arm (W23) continues to hold $27 million secured Convertible Bond in Marley Spoon. In a recent trading update, the company announced that it is planning to develop an automated regional distribution centre as well as a semi-automated national distribution centre at Moorebank Logistics Park in Sydney. Construction for both the centres is likely to be finished by late CY23 with initial benefits anticipated to be realised in FY25. During Q3 FY20, the company reported sales from continuing operations amounting to $16.5 billion, reflecting a rise of 10.7% on the previous corresponding period (pcp). Moreover, the online sales of the group experienced a sharp growth of 34% to $817 million due to COVID-19.

Q3 FY20 Results (Source: Company Reports)

Guidance: For FY20, the company expects to report EBIT (Earnings Before Interest and Tax) in the range of $3,200 million - $3,250 million. The EBIT for Hotels business is likely to be in the ambit of $160 million - $170 million. The company has scheduled to release its full-year 2020 earnings on 27^th August 2020.

Key Risks: The company’s business is exposed to strategic, operational, compliance and financial risks as it operates in a retail environment. These mainly include risks arising from the rising market share of competitors, expectations of customers and business interruptions.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Net margin of the company stood at 2.9% in 1H FY20 as compared to the industry median of 2.4%. This indicates that WOW possesses decent capabilities to convert its topline into the bottom line. We have valued the stock using EV/Sales multiple based illustrative relative valuation method and arrived at a target price of lower double digit-upside (in % terms). For the purpose, we have taken peers such as Coles Group Ltd (ASX: COL), Metcash Ltd (ASX: MTS), and Super Retail Group Ltd (ASX: SUL) to name few. Therefore, considering decent online sales growth during Q3 FY20, planning for the two distribution centres, decent margins and valuation, we give a “Hold” rating on the stock at the current market price of $39.040 per share, up by 0.931% on 3^rd August 2020.

WOW Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Coles Group Limited

COL Details

Growth in Sales Revenue During Q3 FY20: Coles Group Limited (ASX: COL) is engaged in retailing of fresh food, groceries, household goods, liquor, fuel and financial services through its store and online operations. The market capitalisation of the company stood at ~$24.24 billion as on 3^rd August 2020. On 15^th May 2020, the company advised the market that class action proceeding has been filed in relation to the payment of Coles managers employed in supermarkets in the Federal Court of Australia. However, the company believes that the proceeding is without merit, and it will defend the proceeding. During Q3 FY20, the company reported sales revenue amounting to $9.2 billion, up 12.9% on pcp. Supermarket segment experienced a strong performance in the month of January and February 2020 and reported comparable sales growth of 13.1% during Q3 FY20. This was underpinned by continued implementation of its strategy to deliver trusted value through its campaign to lower the cost of BBQs and school lunchboxes. COL reported liquor sales revenue of $740 million, up 6.1% on pcp.

Q3 FY20 Sales (Source: Company Reports)

Outlook: For Q4 FY20, the company anticipates an elevated cost base because of the additional investment due to COVID-19. Liquor is likely to witnessed elevated sales if restrictions on hotels, pubs, clubs and licensed venue operators continue.

Key Risks: The company is exposed to strategic risks, which include competition arising from new entrants, including international discount retailers, digital disruptors, and specialist retailers. The business is also sensitive to consumer behaviour and expectations, which are changing rapidly.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Current ratio of the company stood at 0.66x in 1H FY20, which is in line with the industry median. The company has scheduled to release its FY20 results on 18^th August 2020 and will conduct its 2020 Annual General Meeting on 5^th November 2020. We have valued the stock using a P/CF multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers such as Woolworths Group Ltd (ASX: WOW), Wesfarmers Ltd (ASX: WES), and Harvey Norman Holdings Ltd (ASX: HVN) to name few. Therefore, considering the growth in sales revenue, expected elevated cost base in FY20 and valuation, we give a “Hold” recommendation on the stock at the current market price of $18.460 per share, up by 1.596% on 3^rd August 2020.

COL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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