Coles Group - a lot happening at Coles

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Alex Lu
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By Alex Lu
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Date posted:
02 August 2019, 5:27 PM
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  • Coles Group (ASX:COL) is due to report its FY19 result on 22 August.
  • We forecast FY19 earnings before interest and taxes (EBIT) to be down 7% to A$1,284m.  
  • We expect the result to reflect earnings declines in Supermarkets (EBIT -3%) and Express (-62%), partially offset by growth in Liquor (+5%). 
  • We make minimal changes to earnings forecasts with FY20F underlying EBIT falling 1% to A$1,311m due to the reduction in Liquor earnings on the back of the sale of Spirit Hotels to Australian Venue Co.  
  • Our target price falls marginally (Morgans clients can view the full report & price target here) and we maintain our Hold rating. 

FY19 result due 22 August 

We estimate FY19F EBIT to be down 7% to A$1,284m, reflecting earnings declines in Supermarkets (EBIT -3%) and Express (-62%), partially offset by growth in Liquor (+5%). For 4Q19, we forecast Supermarkets LFL sales to be up 2.0% compared to management guidance for growth at the upper half of the range between the 2Q19 and 3Q19 results, NYE adjusted (ie. between 1.5% and 2.2%).

As has mostly been the case over the past 10 quarters, we expect Supermarkets LFL sales growth to underperform Woolworths (+3.8%). The key however will be cost growth with higher input costs, labour and energy costs.

While COL will look to offset these headwinds via operational efficiencies, overall, we forecast Supermarkets EBIT margin to fall by 30bps to 3.6%. 

Update on cost savings initiatives 

COL is targeting A$1bn in cumulative cost savings by FY23 through initiatives such as the use of technology to automate manual tasks and simplifying above-store roles to remove duplication.

While still early days, we expect management to provide an update on progress achieved to date.

COL to declare its first dividend since demerger

COL did not pay a 1H19 dividend given this was paid as part of Wesfarmers (ASX:WES) interim dividend with reference to the five months of COL earnings prior to the demerger.

The company expects to pay its first dividend in September 2019, which will be the final dividend for FY19 and will incorporate the seven months of earnings post demerger. We estimate 2H19 DPS of 28cps. 

Maintain Hold rating 

The COL business is currently experiencing significant change with several projects underway including the A$1bn cost out program, automation projects, store network optimisation and range tailoring. Investments in data & digital and own brand are also ongoing.

While we believe these initiatives will deliver benefits over time, in the short-term execution remains a key risk.

The operating environment remains highly competitive and with COL trading on 21.8x FY20F PE and 3.9% yield we continue to see the stock as fully valued.

Our equally-blended (discounted cash flow (DCF), Sum-of-the-parts analysis (SOTP), price earnings (PE)) target price falls marginally to (Morgans clients can view the full report & price target here) on the back of minor changes to earnings forecasts. 

More information

Morgans clients can login to view further detailed analysis on the August 2019 Reporting Season by clicking on the 'reporting season' link in the popular topics box on the right-hand-side of the blog homepage. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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