Coles Group Ltd.
COL Details
Coles Group Ltd. (ASX: COL) is a supermarket retailer providing groceries, general merchandise, liquor, fuel and financial services through stores in Australia and e-commerce. The company operates in three segments - Supermarket, Liquor, and Express. COL was listed in ASX on November 21, 2018.
Strategic Developments:
- On December 02, 2021, COL conducted a remediation program and commenced a review on fair work pay arrangements. It had incurred $13 million so far on remediation costs paid to affected salaried staff members and besides made a provision to the tune of $12 million in its books recently.
- COL made a number of changes in its leadership, as announced on November 25, 2021. Leah Weckert was appointed as Chief Executive of the Commercial & Express division effective in April 2022. Charlie Elias has been appointed to succeed Leah Weckert as CFO.
- Vanguard Group ceases to hold substantial shareholding in COL. Shareholding has been reduced to 4.889%.
Key Takeaways from Q1FY22 Sales Update:
- Overall headline sales grew 1.5% in Q1FY22 over the previous year. Its Supermarkets segment witnessed a growth of 1.8% to reach $8.62 billion, and Liquor posted a 2.6% growth. Its Express segment de-grew by 10.1% over the prior year.
- Increased online sales and returning sales post lockdown in NSW, the ACT, and VIC shopping centers have resulted in traction in sales growth. Reduced customer traffic in convenience stores has affected Express segment sales. E-commerce penetration at the Supermarket peaked at 9%, followed by Liquor segment with 4.5%.
- COL is on track to deliver smart selling benefits in excess of $200 million in FY22.
- The company continue to focus on store renewals, with 10 stores renewed in Camberwell, VIC and 35 Liquor format. During the quarter, it had opened two new stores, and the total network count reached 836 Supermarkets.
- It had refinanced $1.3 billion debt through loan facilities that are directly linked to reducing carbon emissions.
Sale Break-up by Segments (Source: Analysis by Kalkine Group)
Key Risks: Changes in consumer spending directly impact the sales volume. Increasing inflation and high unemployment rate drags the traffic growth and affects high-ticket spending. The rollback of government stimulus program also affects consumer spending. Increasing property prices and commercial vacancy rates affect the store expansion strategies.
Outlook: COL is expecting volumes at the Express segment is expected to recover in the second half of FY22 as consumer behaviour normalizes and mobility increases. Due to the increasing spread of the new virus, the company has reduced its capex for FY22 from $1.4 billion to $1.2-$1.4 billion range. COL is expecting to incur lower COVID-19 related costs in the second half of FY22.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
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: Over the last six months, the stock has corrected by ~2.88%. The stock is trading lower than the average of the 52-week low price of $15.275 and the 52-week high price of $18.940. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price with an upside of low double-digit (in percentage terms). The company can trade at a slight discount to its peers, considering the increasing spread of the new virus variant and fears of lockdown impacting volume offtake in stores. For the valuation purpose, peers such as Woolworths Group Ltd. (ASX: WOW), Metcash Ltd. (ASX: MTS), Elders Ltd. (ASX: ELD), and others have been considered. Considering the decent sales growth in Q1FY22, modest outlook, diversified revenue streams, increasing online penetration, valuation, and current trading levels, we recommend ‘Buy’ rating on the stock at the closing market price of $16.510, down ~0.841% as on 12th January 2022.
COL Daily Technical Chart, Data Source: REFINITIV
Note 1: The reference data in this report has been partly sourced from REFINITIV
Note 2: Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and is subject to the factors discussed above alongside support levels provided.
Technical Indicators Defined: -
Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.
Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.
Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.
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