Woolworths Group Limited

WOW Details 

Release of Demerger Booklet to Shareholders: Woolworths Group Limited (ASX: WOW) is involved in retail operations and runs ~3,292 stores. Its segments consist of Australian Food, New Zealand Food, Endeavor Drinks, BIG W and Hotels. As of 10 May 2021, the company’s market capitalisation stood at ~$47.97 billion. On 10 May 2021, WOW informed the market about the proposed demerger of Endeavour Group. Once implemented and approved, the demerger will lead to the creation of two separate independent entities. For every WOW share held, eligible shareholders will receive one new Endeavour Group share at the record date of the demerger. During the demerger period, WOW, and its JV partner Bruce Mathieson Group will hold 14.6% interest each in Endeavor Group. The Board of Directors (BOD) of WOW has advised its shareholders to vote in favour of the proposed demerger. As per an Independent expert’s evaluation carried out, the demerger is in the best interests of shareholders.

The management believes that the demerger will increase the value to Endeavour Group’s shareholder and WOW will have a better organisational structure and focus on its business. WOW, and Endeavour Group will continue to seek the benefits from their ongoing alliance across Loyalty & Fintech, Digital & Media, Supply Chain & Stores, Business Support, and International areas. The company has released a Demerger Booklet and sent a notice of meeting to WOW’s shareholders for the proposal consideration. The Group targets the demerger of the Endeavour Group for late June 2021.

A Sneak-Peak at the Q3FY21 Results: The company reported $16,566 million sales, up by ~0.4% YoY in Q3FY21, due to the volatile trading experienced during the two halves of the quarter. WOW experienced normalisation of shopping behaviour by the customers overall. The Group’s eCommerce sales increased to $1.3 billion, up by 64.2% YoY in Q3FY21. It recently notified an increase in its ownership in Quantium to 75% and will evolve its advanced analytics strategy.

Q3FY21 Result Highlights (Source: Company Reports)

Key Risks: The company is exposed to the risk of store closures, low customer attendance due to the pandemic situation. It also faces the threat of peer competition, launch of new products and changes in the income and shopping preferences of the customers.

Outlook: WOW has declared plans for starting its eCommerce fulfilment program. It will commence the construction of an automated customer fulfilment centre in Sydney in 2021 post-approval. The facility will have a capacity for fulfilling 50K orders per week, built in partnership with Knapp and will be operational by FY2024. WOW will make digital customer engagement a priority. The Group also plans to set up Q-Retail, a new business, to execute an advanced analytics roadmap and market products externally.

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

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of WOW gave a negative return of 2.76% in the past three months and a positive return of 16.71% in the past year. The stock is currently trading higher than the 52-weeks’ average price level of $33.82-$42.57. The stock of WOW has a support level of ~$39.336 and a resistance level of ~$41.333. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a slight discount than its peer average, considering the volatility in sales growth in Q3FY21, negative sales growth in New Zealand in April month and the risks associated with the retail environment in the pandemic situation along with changes in consumer spending. For this purpose, we have taken peers like Coles Group Limited (ASX: COL), Metcash Limited (ASX: MTS), Coco-Cola Amatil Limited (ASX: CCL), to name a few. Considering the decent results of Q3FY21, new stores opened in Q3FY21, digital growth witnessed in Q3FY21, commencing the e-Commerce fulfilment program in 2021, set up Q-Retail, and valuation, we give a ‘Hold’ rating on the stock at the current market price of $40.50, up by ~2.739% as on 10 May 2021.

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

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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