Stocks’ Details

Woolworths Group Limited

ACMR Imposed Penalty of $1 Million: Woolworths Group Limited (ASX: WOW) is engaged into food, general merchandise, and specialty retailing via chain store operations. The market capitalisation of the company stood at ~$46.61 Bn as on 2^nd July 2020. As per the recent information published on various media platforms, the company has paid a fine amounting to $1 million for the non-compliance of anti-spamming laws. The fine has been imposed by the Australian Communication and Media Authority (ACMA), wherein ACMA found the retailing giant guilty in sending marketing emails to those customers, who had unsubscribed from the mailing list.

In a recent update, the company announced that it is planning to develop an automated regional distribution centre and a semi-automated national distribution centre at Moorebank Logistics Park in Sydney. The construction for the same is expected to be finished by the end of CY2023 with initial benefits anticipated to be realised in FY2025. During Q4, the company experienced strong trading performance, excluding hotels business. During the month of May and June 2020, WOW witnessed improved sales in Australian Food and Endeavour Drinks segment following a more subdued April impacted by unusual trading patterns around Easter and Anzac Day. During Q3 FY20, the company reported sales from continuing operations of $16.5 billion with a rise of 10.7%.


Q3 FY20 Sales (Source: Company Reports)

Guidance: For FY20, the company expects EBIT in the range of $3,200 million - $3,250 million. The company is likely to report hotels EBIT of between $160 million - $170 million. The company will release its FY20 results on 27^th August 2020.

Key Risks: The company is exposed to strategy and competition risk, which is influenced by technology disruption, new market entrants, and rapidly changing customer needs and preferences. Moreover, the business is also sensitive to financial, treasury and insurance risks. To manage these risks, WOW made a treasury policy which governs the management of its treasury risks, including liquidity, funding, interest rates, foreign currency, the use of derivatives and counterparty risk.

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: WOW will invest $700 million - $780 million in technology and fit-out of the two distribution centres in the upcoming four years. The company has inked an initial lease term of 20 years with Qube Holdings Limited. Over the span of four years (2015-2019), the company maintained positive free cash flows, which reflects the prudent use of working capital. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Coles Group Ltd (ASX: COL), Metcash Ltd (ASX: MTS), and JB Hi-Fi Ltd (ASX: JBH), and arrived at a target price of high single-digit upside (in percentage terms). Therefore, considering the plans for the development of an automated regional distribution centre, sales growth during May and June 2020 and decent use of working capital, we give a “Hold” recommendation on the stock at the current market price of $37.180 per share, up by 0.759% on 2^nd July 2020.

Kathmandu Holdings Limited

Growth in Same-Store Sales: Kathmandu Holdings Limited (ASX: KMD) is involved in the retailing of clothes and equipment for travel and adventure. The market capitalisation of the company stood at $762.18 Mn as on 2^nd July 2020. Recently, the company updated the market players with a trading performance for six weeks from 18 May to 28 June 2020. The company reported Rip Curl same-store sales growth of 21.0%, reflecting the growth of 5.1% in retail stores and 151% in online sales. In addition, Kathmandu same-store sales moved up by 12.5%. The growth in same-store sale was mainly due to ease in lockdown restrictions, which allowed reopening of stores. However, Group sales for the 10 months ended 31 May 2020 experienced a fall of 15.1% over pcp. During 1HFY20, the company reported a rise of 58.8% in total sales to NZ$363.7 million.


Financial Performance (Source: Company Reports)

EBITDA Guidance: For FY20, the company expects to report adjusted EBITDA of more than $70 million, considering the current COVID-19 conditions globally.

Key Risks: The company is exposed to various downside risks pertaining to the future uncertain economic environment, subsequent to the Government assistance packages. Further, the company is battered by COVID-19 led outbreak, along with the adverse impact of lower foot-traffic on CBD and tourist located retail stores from travel restriction.

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: In the month of April 2020, KMD finished the equity raising of NZ$207 million in order to strengthen its balance sheet and liquidity position in response to the COVID-19 pandemic. The company anticipates to close FY20 with available liquidity in excess of $300 million on the back of the current assessment of the operating environment and outlook. We have valued the stock using a P/CF multiple based illustrative relative valuation methodand arrived at a target price of low double-digit upside (in percentage terms). Therefore, considering the growth in same store sales and recent equity raising, we give a “Hold” recommendation on the stock at the current market price of $1.175 per share, up by 9.302% on 2^nd July 2020.
 

Super Retail Group Limited

Completion of Institutional Entitlement Offer: Super Retail Group Limited (ASX: SUL) is engaged in the operation of specialty retail stores in the automotive, tools, leisure and sports categories. The market capitalisation of the company stood at ~$1.79 Bn as on 2^nd July 2020. Recently, the company has successfully completed the institutional component of the non-renounceable entitlement offer and raised around $158 million. The company experienced strong support from institutional shareholders with a take-up rate of around 95%. Moreover, the company recently released the Retail Offer Booklet for its Retail Entitlement Offer and is likely to raise around $45 million. This equity raising would allow the company to execute its strategy and pursue strategic growth initiatives. The company experienced a rebound in the sales during May 2020, which was led by the Supercheap Auto, Rebel and BCF brands.
 

Indicative Timetable (Source: Company Reports)

Strategy: The strategy of the group revolves around (1) growing annual customer value, (2) becoming an efficient omni-retailer and (3) focusing on organic growth and capital discipline. The company will release its FY20 results on 24^th August 2020.

Key Risks: As the group operates in the retail space, the major risks with the business includes competition intensity, customer expectations, omni-retail transformation as well as supply chain and inventory agility for omni-retail to meet evolving customer expectations.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings 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: Currently, the company has bank debt facilities of $755 million, with a range of maturities out to 2022. At the end of May 2020, net debt of the company stood around $208 million. The company reported a CAGR of 8.46% in free cash flow during the last four years (2015-2019). We have valued the stock using the P/E multiple based illustrative relative valuation method andarrived at a target price with high single-digit upside (in percentage terms).For the purpose, we have taken peers such as JB Hi-Fi Ltd (ASX: JBH), Harvey Norman Holdings Ltd (ASX: HVN), and Metcash Ltd(ASX: MTS). Thus, considering the rebound in sales during May 2020, decent growth in free cash flows, and strategy pillars, we give a “Hold” recommendation on the stock at the current market price of $8.400 per share, up by 2.815% on 2^nd July 2020.

Myer Holdings Limited

Reopening of All Stores on Staged and Trial Basis: Myer Holdings Limited (ASX: MYR) operates 60 departmental stores throughout Australia. The market capitalisation of the company stood at ~$180.68 Mn as on 2^nd July 2020. Recently, the company announced that it has reopened all its stores on a staged and trial basis considering the government measures and conditions in the different states and territories. The company added that all its stores would operate in a manner that protects the health and wellbeing of customers and team members, with improved safety and cleaning measures. During 1H FY20, the company reported a fall of 3.8% in total sales to $1,607.9 million and statutory NPAT for the period stood at $24.4 million. Despite macro headwinds, the company made solid progress on the implementation of Customer First Plan initiatives.

 
Key Financials (Source: Company Reports)

Outlook: MYR expects the challenging macro environment to continue in the second half and will manage the same in the best interest of customers and shareholders. The company expects numerous opportunities to improve productivity, particularly in the areas of store occupancy, factory to customer and fulfilment for stores and online.

Key Risks: The company is exposed to external risks such as the fluctuation of the Australian dollar and interest rates, poor consumer confidence, changes in government policies, external, natural or unforeseen events. MYR analyses and monitors economic and other available data in order to mitigate the future impact on sales.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings 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: Gross margin and EBITDA margin of the company stood at 46.4% and 7.8% in 1H FY20, reflecting YoY growth of 0.3% and 3.2%, respectively. The stock of MYR is inclined towards its 52-week low level of $0.083, offering decent opportunities to accumulate. The company has scheduled to release its FY20 results on 7^th September 2020.We have valued the stock using the P/E multiple based illustrative relative valuation method andarrived at a target price with low double-digit upside (in percentage terms).For the purpose, we have taken peers such as Super Retail Group Ltd (ASX: SUL), Baby Bunting Group Ltd(ASX: BBN), Adairs Ltd(ASX: ADH), etc. Thus, considering the improvement in key margins, reopening of all stores, current trading levels, and key risks, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.215 per share, up by 2.273% on 2^nd July 2020.

 
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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