Three Supermarket Stocks of Australia

 
Woolworths Limited



WOW Details

Turnaround Measures:Woolworths Limited (ASX: WOW) has chosen Bega Cheese to manufacture and pack a range of its private label products including the cheese, UHT, adult milk powder and cream. This expansion of its private label products is a part of the group’s turnaround measures. Moreover, the recent recovery in the consumer sentiments would boost the Australian Supermarkets and consequently WOW’s performance. WOW has commented about incurring restructuring costs of $959 million ($571 million non-cash) or $766 million after tax which would be recognized in the FY 2016 results. WOW has implemented the new operating model to drive improved accountability and performance. The company has taken the decisive action on the General Merchandise with restructuring costs of $460 million, including $309 million impairment of EziBuy.
 


Stores Update (Source: Company Reports)
 
WOW’s transformation of BIG W is progressing well under Sally Macdonald’s leadership and the impairments and other restructuring costs of $151 million would lead to the improved performance. In addition, WOW is taking cautious expansion plans and accordingly slowed the new Australian Supermarkets rollout while focusing on renewing the current stores and intends to close the underperforming or unprofitable stores. The group’s investments in new product ranges, pricing points and customer scores would drive benefits in the coming months. Meanwhile, WOW stock has risen 5.55% in the last six months (as of August 12, 2016) and the stock has a decent dividend yield. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $23.49
 

WOW Daily Chart (Source: Thomson Reuters)
 
Wesfarmers Limited



WES Details

High level of Inventory: Wesfarmers Ltd(ASX: WES) expects the FY 16 capital expenditure to be in the range of $1.3b to $1.4b which would be used for acquisitions and organic growth including growth of Coles & Bunnings. WES has high levels of seasonal stock of more than $100 million in the first half and the company has to complete EDLP transition, reduce SKUs & inventory levels. Moreover, the coal prices are falling from the past few years which has affected the Resource segment while the short term over supply would continue to affect the coal pricing. Curragh’s coal supply obligations to Stanwell would continue to impact their earnings as well as Curragh’s recoverable value depends upon the future currency and the export coal price assumptions.  Accordingly, the Non-cash impairment of $600 million to $850 million pre-tax is to be recorded in Curragh for FY 2016.
 


Production highlights (Source: Company Reports)
 
In addition, WES has made restructuring costs and provisions of $145 million to significantly rebase Target and expects EBIT loss in Target for FY2016 of approximately $50 million, due to high seasonal clearance activity and lower gross margins. The non-cash impairment of $1,100 million to $1,300 million pre-tax is to be recorded in Target for FY 16. WES is developing pilots for Bunnings Warehouse and the first is expected to come up later 2016. WES is also progressing with the liquor turnaround with its five-year transformation plan.  Additionally, WES had spent $705 million for the acquisition of UK based Homebase (completed on 27th February 2016), and planned to spend over $1 billion on its restructuring. The investment in the UK has been said to have a negative currency impact given the value of sterling versus the Aussie dollar post the EU referendum. Meanwhile, WES stock has fallen 0.72% in the three months (as of August 12, 2016), and is trading at a high P/E. WES is going to report the FY 16 results on 24th August 2016 and we give an “Expensive” recommendation on the stock at the current price of $42.60 , ahead of its results.
 

WES Daily Chart (Source: Thomson Reuters)
 
Metcash Limited



MTS Details

Tight cash management and capital recycling: Metcash Limited (ASX: MTS) has fallen 6.5% in the last five days (as at August 12, 2016). The company’s EBIT declined by 7.4% to $275.4 million (FY15: $297.3m) in line with expectations though the results were negatively impacted by decline in Convenience earnings. MTS’s underlying Profit after Tax is $178.3m as compared to $173.6m of FY15 which reflects the lower finance costs in FY16, partly due to a $9.6m gain resulting from the restructuring of finance facilities. Moreover, the net debt is reduced by $392.3m to $275.5m. This reflects tight cash management and capital recycling which includes $242.1m in proceeds from the disposal of the Automotive business, and $57.3m from the sale of surplus assets. In addition, MTS has completed the second year of its Transformation Plan. MTS has reoccupied the Huntingwood site in April 2016 and expects it to be fully operational in 2H17. The Food & Grocery business continues to face headwinds from competition, deflation and a rising cost base. Meanwhile, the insurance recovery is progressing well for the Huntingwood Distribution Centre which was damaged by hail, with total recoveries of over $60m to date. In addition, in food & grocery segment of MTS will pilot and roll out Core Ranging “Mini DSA” and would launch the new mid-tier private label brand. The segment is facing challenges related to competition in both the South Australian and Western Australian markets, deflation and a rising cost base. Additionally, MTS has intention to recommence the half yearly dividend payments with effect from the FY17 final dividend, subject to capital requirements. We give an “Expensive” recommendation on the stock at the current price of $2.04
 

MTS Daily Chart (Source: Thomson Reuters)

---