Woolworths Group Limited

Marley Spoon Secures A$8m Funding Deal: Woolworths Group Limited (ASX: WOW) is primarily engaged in the retail operations across Australian food, Endeavour drinks, New Zealand food, Big W and Hotels. Woolworths Group Limited and Union Square Ventures extend their current investment in Marley Spoon, a leading global subscription-based meal kit provider, by ~A$4 million each, for the total amount of around A$8 million. Marley Spoon AG and Woolworths Group approved the senior secured commercial loan agreement for the loan amount amounting of A$4,047,250 (around €2.5 million). It was further added that the loan involves a term of six months and bears interest at the fixed rate of 7% p.a. 

Dividend Distribution And General Meetings:With respect to 2019 AGM and EGM, it was mentioned that Annual General Meeting of the company would be held on December 16, 2019 and an EGM to consider stage 1 of the proposal which was announced on July 3, 2019, to create and separate Endeavour Group, has also been scheduled to be conducted on December 16, 2019. The company announced a fully franked final dividend of 57 cents per share on the ordinary fully paid which was paid on 30 September 2019. The following image provides an idea of the dividends:

Dividends Declared (Source: Company Reports)

FY19 Financial Performance: During the year ended 30 June 2019, normalised ROFE from continuing operations went up by 11 bps on a YoY basis, which was driven by improved EBIT and working capital. Net profit after tax (NPAT) attributable to Woolworths Group shareholders went up by 7.2% (on normalised basis) to $1,752 million. The company encountered a sales growth of 3.4% (on normalised basis) in FY19 to $59,984 million.

Outlook:The company is optimistic on material opportunities that it has throughout the group to deliver value for customers as well as shareholders in FY 2020. In Australian food, renewals, improved fresh experience, and range localisation are expectedto support the growth in sales and the company also expects online sales to strongly grow with an increase in the roll-out of Metro stores.
 

 New Zealand food is focused on prices, fresh quality and experience and building on Simpler for Stores. There are expectations that CountdownX would continue to improve as well as innovate the customers’ digital experience.
The Endeavour Drinks and ALH merger is progressing and the shareholder approval for Restructure has been proposed to be sought on December 16, 2019.

F20 Key Priorities (Source: Company Reports)

Stock Recommendation: Gross profit margin of the company stands at 29.1% in FY19, which is higher than the industry median of 26.2%, implicating that the company managed its costs well and made a reasonable profit on sales. The company also reported a higher EBITDA margin of 6.3% as compared to industry median of 5.8%, indicating stable earnings and the company’s effectiveness. In terms of valuation, the stock is trading at the P/E multiple of 18.390x and witnessed a CAGR of 1.8% in gross profit in the time span of FY 2015- FY 2019.
 

Currently, the stock is trading at close to its 52-week higher levels of $38.42 with PE multiple of 18.39x. Hence, considering the above-mentioned points coupled with decent outlook and current trading levels, we recommend a “Hold” rating on the stock at the current market price of A$37.800 per share, down 0.343% on October 28, 2019.
 

Westpac Banking Corporation

Acknowledgement of Financial Product Advice Ruling: Westpac Banking Corporation (ASX: WBC) has acknowledged judgment by Full Federal Court in relation to provision of the financial product advice, in which the Court allowed ASIC’s appeal and dismissed Westpac’s cross-appeal. This decision relates to the test case brought by ASIC against Westpac Securities Administration Limited as well as BT Funds Management Limited with regards to the calls to 15 customers concerning rollover of their superannuation accounts. The release stated that, in these proceedings, ASIC alleged that Westpac provided “personal advice” and in doing so breached certain provisions of Corporations Act. Finally, it was mentioned that Westpac has been carefully considering the judgment.

S&P Upgrades The Rating Of Certain WBC Capital Instruments: S&P Global Ratings has upgraded Westpac’s stand-alone credit profile by one notch to ‘a’ from ‘a-‘ and has indicated that this change does not affect the senior debt rating of Westpac, which has been affirmed at AA-/A-1+/stable, but it increased the S&P rating on certain capital instruments issued by Westpac by one notch. Securities impacted include Basel III compliantTier 2 instruments to 'BBB+' from 'BBB’ and Basel III compliant Additional Tier 1 capital instruments to 'BBB-' from 'BB+'.
 
APRA Consultation - Subsidiary Capital Investment Treatment: APRA proposes that equity investments in subsidiaries will be risk-weighted at 250%, upto the limit of 10% of level 1 Common Equity Tier 1 (or CET1) capital.  Secondly, it has been proposed that equity investments in excess of the 10% limit will be fully deducted from Level 1 CET1 capital in determining Level 1 capital ratios. Westpac’s largest equity investment in a subsidiary is in Westpac New Zealand Limited. Westpac also has equity investments in several other banking and insurance subsidiaries which are each below the 10% limit. Notably, Westpac’s Level 2 CET1 ratio was 10.5% as at 30 June 2019.

Dividend and AGM resolutions: The bank announced a dividend of $1.0183 on WBCPG - CAP NOTE 3-BBSW+4.90% PERP NON-CUM RED T-12-21 which is to be paid on 30 December 2019. The 2019 annual general meeting of the bank is to be held on 12 December 2019.

Pillar 3 Report: Westpac’s common equity Tier 1 capital ratio went up by 1 basis point from 30 September 2018 and stood at 10.64% at 31 March 2019 which included first half 2019 cash earnings of $3,296 million. While cash earnings were lower, the CET1 capital ratio of 10.64% has enabled the Group to maintain its interim dividend (fully franked) at 94 cents per share. This represents a pay-out ratio of 98%.


Dividends (cents per share) (Source: Company Reports)

Outlook: For 2H FY 2019, the bank is expecting system credit growth to moderate and it would focus towards returns. It is targeting a reduction in expenses by 1% on FY 2018. In 2H19, the bank will prioritise customer refunds and will deal with regulatory/litigation matters. It priorities for 2H FY 2019 revolve around dealing with the outstanding issues and structural cost reduction. Also, it would focus towards momentum in customer franchise.

Stock Recommendation: The tier 1 risk-adjusted capital ratio stands at 12.84% which is an improvement from September 30, 2018 figure of 12.78%. The stock of Westpac also witnessed a growth of 4.72% in the past 6 months. Currently, the stock is trading towards its 52-week higher levels of $30.05 with PE multiple of 14.10x and an annual dividend yield of 6.47%. Hence, in view of above-stated facts and current trading levels, we recommend a “Hold” rating on the stock at the current market price of A$28.990 per share, down 0.207% on October 28, 2019.

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