Macquarie's view
Date: Mon, 26 Aug 2002 14:11:44 +1000
Good afternoon all,
Woolworths has come off quite strongly today following their profit result. As you can see from the attached research we believe that the stock looks quite cheap at this level and I think that it would be well worth buying at these prices. For those looking to get it a little bit cheaper it may drop more in the next few days but I believe that it is offering excellent value for the long term at this price.
These notes have been approved for external distribution
The result looks fairly solid. Whilst it is slightly below expectations (0.5%) it is important to recognise that this is due to upgrades of 2% only a month ago. Management gave FY03 guidance of 10% sales growth and EPS growth of 10-15% (MRE 15.1%). This guidance is in line with expectations. The concern is that EBIT grew 17.8% to $832.7m (MRE $850m). This may be below expectations with negative working capital perhaps boosting the interest line and offsetting a slightly weaker EBIT line (ie a weaker operating result). Overall, this is a reasonable result however and management commentary is also quite positive. This will give the market confidence that Woolworths is well placed to deal with increasing competition in the supermarket channel. We retain a DCF valuation of $14, however this does imply some reasonably high valuation multiples that may be prohibitive in the near term. MRE certainly believe that Woolworths is exceptionally well placed for the longer term. There are further significant cost savings which management can achieve to enhance their already significant competitive advantage. In the near term however, competitive issues and already high valuation multiples may prevent the stock from outperforming the broader market. We have therefore reduced our recommendation to market perform.
Details:
EPS increased 25.1% to 50.2c (MRE 50.5c). ROE increased significantly from 43.2% to 48.1%. Looking forward Woolworths have further consolidated its already extremely strong industry position through driving increased productivity savings. This was reflected by the cost of doing business falling 24bps, 2/3 of which was re-invested into price. This offset gross margins which were down 16bps. Woolworths competitive advantage was further enhanced by improved working capital management. Inventory was reduced 3.3 days to 37.3 days leading to negative working capital increasing to $796m, up from $516m. Market expectations had been for a 1.5 day reduction in inventory. Woolworths Food & Liquor group's national market share grew from 25.6% to 28.3% in an increasingly competitive supermarket environment. Market share strengthened in May and June - largely at Coles expense. It is becoming clear that Woolworth's EDLP strategy has them much better placed than Coles to be able to continue further sales growth, which ultimately drives Woolworths earnings performance. Big W grew its EBIT margin from 4.03% to 4.10% on the back of 10.2% sales growth. Given the challenging General Merchandise market in Australia (ie a wounded Coles Myer), this performance is pleasing. Big W's price and value offer has it differentiated from Kmart and Target, and is attracting increasing customer traffic. We believe Woolworths are on track to report very strong 1Q03 sales, which should at underpin its $12 share price.
WOW Price at posting:
0.0¢ Sentiment: None Disclosure: Held
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