Woolworths Group Limited

WOW Details

Increased interest in Quantium: Woolworths Group Limited (ASX: WOW) is engaged in retail operations. The Company’s segments include Australian Food, New Zealand Food, Endeavour Drinks, BIG W and Hotels. The company operates primarily in Australia and New Zealand and operates approximately 3,292 stores. On 20 April 2021, the company announced that it is going to increase its interest in Quantium from 47% currently to 75% for a consideration of $223mn. Quantium’s advanced analytics capability and Woolworths Group’s retail capabilities are expected to unlock value across the company’s entire retail ecosystem.

1HFY21 Financial Highlights: The company has posted an increase in its sales in 1HFY21 to $35,845mn as compared with $32,410mn in 1HFY20 despite COVID-19 situation. The company has registered a growth in sales across all its segments except Hotels. The company has posted an increase in NPAT to $1,135mn in 1HFY21 as compared with $887mn in 1HFY20. For H1FY21, the company has paid an interim dividend of 53 cents per share. At the current market price of $41.630, the company’s annual dividend yield stood at 2.40%.

Key Financials (Source: Company Reports)

Key Risks: WOW is mainly engaged in retailing of food products and any disruption in supply chain will lead to a decline in sales for the business and may lead to financial loss for the company. The company requires regulatory approvals to carry out its business activities, any delay in approval from the regulator may result in financial losses for the company. 

Outlook: As per the company reports, the company is expecting a lower cost in 2HFY21 as compared with 1HFY21 on expectation of lifting of trade restrictions in 2HFY21. The company is expecting growth in its digital and eCom segments and expecting to drive efficiency in these segments in 2HFY21. 

Valuation Methodology: EV/Sales based Relative Valuation Method (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: In the last one month, WOW has increased by ~7.01% and by ~5.31% in the last three months. The current market capitalisation of WOW stands at ~$53.25bn as of 20 April 2021. The stock is currently trading above the average 52-week price level range of ~$33.82-~$42.47. On the technical analysis front, the stock has a support level of ~$40.866 and a resistance of ~$42.475. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer median, considering the growth in sales in all business segments except hotels and an increase in profits in 1HFY21. For this purpose, we have taken peers Coles Group Ltd (ASX: COL), Graincorp Ltd (ASX: GNC), Metcash Ltd (ASX: MTS), etc. Considering the company’s decent performance in H1FY21, its increasing interest in Quantium, modest outlook and expected upside in valuation, we recommend a “Hold” rating on the stock at the current market price of $41.63, down by 0.905% as on 20 April 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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