Coles Group Limited

COL Details

Strong Balance Sheet with lower debt level in 1H19: Coles Group Limited (ASX: COL) is a leading retailer in Australia with business wings of Coles Supermarkets, Coles Online, Coles Liquor, Coles Express, flybuys, Coles Financial Services, Spirit Hotels, etc. As a result of demerger from Wesfarmers Limited in November 2018, Coles operates into three segments – Supermarkets, Liquor, and Express. The results of the Company for the half-year ended 30 December 2018 included the numbers for Kmart, Target and Officeworks until the date of transfer, being 19 November 2018.

The company recently updated that it will release its full-year 2019 results on 22 August 2019.

The company also unveiled Refreshed strategy on Investor Day 2109 wherein it clearly mentioned its intentions to become the most trusted retailer in Australia with providing the domestic citizens healthy lives through best value food and drinks, pace of execution, investment to lead in automation and digital, etc. These strategic refresh steps will reposition the business to achieve its long-term growth.

In the month of June 2019, S&P Dow Jones Indices announced its quarterly rebalance June 2019 for the S&P/ASX Indices. COL was removed from S&P/ASX 20 Index, effective at the open on June 24, 2019.

Key Highlights of 1HFY19 (for the period ended 30 December 2018): The statutory sales from continuing operations witnessed a rise of 2% to $20,235 million. The growth was mainly on account of an increase of 3.1% in Supermarkets’ top-line. However, EBIT saw a decrease of 27% to $567 million from a combination of restructuring provision in Supermarket’s amount to $146 million, fall of $35 million in Express EBIT along with risen corporate costs with regards to the demerger.
 

1H19 Results Snapshot of the Group (Source: Company Reports)
 
Statutory topline for Supermarkets went up 3.1%, mainly due to the function of campaigning, an improvement seen in-store execution, better performance of Coles Online sales. However, unfavorable weather had an impact in the second quarter of 2019. EBIT came in at $441 million, down 26.7% owing to a restricting provision cost of $146 million.

Liquor segment saw statutory topline of $1,679 million, down 0.2% on yoy, due to poor weather conditions during the second quarter. EBIT for the segment posted a rise of 3.7% to $84 million, supported by improved productivity.
For Express segment, statutory top-line dipped 2.5% to $2,840 million, which was led by the lower fuel volumes. EBIT had a more severe impact which posted a fall of 42.7% to $47 million on account of lower fuel volumes. De-growth in top-line led to the fall in net margins as well.

The company enjoys a strong balance sheet with favorable working capital. The leverage level on the balance sheet is quite comfortable at 0.8x with the gross debt reduction to $1.6 billion.

Outlook: The company saw the continued momentum in sales in 3^rd quarter of 2019, similar to the 2^nd quarter. However, input costs are expected to remain high. The company anticipates its first dividend to be announced in the month of September 2019 for the period ended 30 June 2019. The Management intends to target the dividend payout ratio in the range of 80-90% of the bottom-line for the period of 28 November 2018 - 30 June 2019. The Management expects net capital expenditure for FY19 to shrink in the range of $700 million to 800 million.

Stock Recommendation: Meanwhile, the stock has risen 11.89% in the past three months as at 19 July 2019. With strong cash realization, favorable working capital position, comparatively lower capital expenditure, robust balance sheet leveraged at 0.8x, we expect the stock to continue its momentum, going forward. Hence, we recommend a “Buy” rating on the stock at the current price of $13.720 (down 1.508% on 22 July 2019).


COL Daily Chart (Source: Thomson Reuters) 

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