Woolworths Group Limited

WOW Details

Ceasing to be a Substantial Shareholder: Woolworths Group Limited (ASX: WOW) is involved in retail operations. Its segments consist of Australian Food, New Zealand Food, Endeavor Drinks, BIG W, and Hotels. Recently, the company informed the market that Woolworths Group Limited and each of its related bodies corporate has ceased to be a substantial holder of ALE Property Group, effective from 1 July 2021.

WOW Demerged Endeavour Group:

• On 1 July 2021, the company informed the market that it has demerged Endeavour Group Limited. The latter has started trading on ASX as a separate entity under the ticker symbol “EDV”. The news was announced on 10 May 2021.
• Notably, for every WOW share held, eligible shareholders will receive one new Endeavour Group share at the record date of the demerger.
• WOW now holds 14.6% shareholding interest in Endeavour Group. On 18 June 2021, the shareholders of WOW voted in favour of the demerger.

Other Recent Updates: On 28 June 2021, the company completed the long-held buyout of 65% interest in PFD Food Services pursuant to the Australian Competition and Consumer Commission verdict of not disagreeing with WOW’s planned investment in PFD Food Services.

Q3FY21 Key Findings:

• The company reported $16,566 million sales in 3QFY21, up by 0.4% YoY, due to the volatile trading experienced during the two halves of the quarter.
• The Group’s eCommerce sales increased to $1,341 million, up by 64.2% YoY in Q3FY21.

Revenues Highlights; Analysis by Kalkine Group

Key Risks:

• COVID-19 Led Uncertainties: The company is exposed to the risk of store closures, low customer attendance due to the pandemic situation.
• Stiff Competition: WOW also faces the threat of peer competition, the launch of new products, and changes in the income and shopping preferences of the customers.

What to Expect: Following the buyout of Quantium on 31 May 2021, WOW shall recognise a non-cash gain of around $220 million in FY21. WOW will also record ~$69 million in transaction costs pertaining to the demerger of Endeavour Group and PFD Food Services-related acquisition costs. The demerger will create simpler, more focused, and independent businesses of WOW, which will be better equipped for future growth.

Valuation Methodology: P/E 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 positive return of ~11.1% in the past nine months and a positive return of 11.9% in the last one year. The stock has 52-week high and low levels of $44.06 and $35.955, respectively. We have valued the stock using the P/E multiple-based illustrative valuation and have arrived at a target price with a correction of mid-single-digit (in % terms). We believe that the company might trade at a slight premium as compared to its peer average, considering higher eCommerce sales, acquisition synergies, and a decent outlook. For the purpose, we have taken peers such as Coles Group Ltd (ASX: COL), Treasury Wine Estates Ltd (ASX: TWE), to name a few. On the technical analysis front, the stock of WOW has a support level of ~$36.21 and a resistance level of ~$40.2. Considering the current trading levels, steep price movement in the past months, valuation, and key risks associated with the business due to the volatile economic environment, we suggest investors to book profit on the stock and give a ‘Sell’ rating on the stock at the current market price of $38.57, as on July 15, 2021, 1.05 PM (GMT+10), Sydney, Eastern Australia.

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

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: 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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