Woolworths - Looking to maintain momentum

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
02 August 2019, 4:41 PM
Sectors Covered:
Industrials

  • WOW is due to report its FY19 result on 29 August.
  • We forecast FY19F earnings before interest and taxes (EBIT) to be up 2% to A$2,601m driven mainly by the core Australian Food division (EBIT +4%)
  • We expect mixed results from the remaining divisions with earnings declines at Endeavour Drinks (EBIT -4%) and NZ Food (-1% in NZD), Hotels flat and Big W EBIT improving to -A$89m (vs -A$110m in FY18). 
  • We expect the balance sheet to remain strong with management also likely to provide an update on the Big W network review and Endeavour Group restructure.
  • We make no changes to earnings forecasts and maintain our Hold rating (Morgans clients can view the full report here)

 

FY19 result due 29 August 

We forecast FY19 EBIT to be up 2% to A$2,601m (Bloomberg consensus A$2,678m). We expect the core Australian Food business to deliver 4% EBIT growth on the back of 3.2% LFL sales growth.

Given only part of the Disney Words promotional campaign fell during 3Q19, we expect further benefits in 4Q19. Costs will be a key area of focus with pressures such as meat and the EBA that came into effect in January being a headwind.

Offsetting this however will be easing price deflation and productivity gains and overall, we forecast Australian Food FY19F EBIT margin to rise by 10bps to 4.7%.

Despite the recent A$1.7bn off-market buyback we expect the balance sheet to remain strong (FY19F fixed charges cover 2.7x). Management is also likely to provide an update on the Big W network review and Endeavour Drinks and ALH merger/demerger. 

Still plenty to do at Big W 

Despite consistent sales improvement over the past two years on the back of lower prices, an improved product range and a better digital offer, Big W continues to lose money. Management is targeting FY19 EBIT of between -A$80-100m (Morgans -A$89m), which is a slight improvement on FY18 (-A$110m).

Management is clearly not happy with the pace of improvement and have decided to close 30 stores (~16% of the current network) over the next three years and two distribution centres. While store closures will help, the retail landscape remains highly competitive with consumer confidence weak.

At this stage we don’t anticipate Big W to breakeven until FY22. 

Maintain Hold rating 

We make no changes to earnings forecasts and maintain our PE-based target price.

While Australian Food continues to generate good LFL sales momentum, Endeavour Drinks earnings are under pressure and Big W remains loss-making.

We are also wary about rising costs and the need for further investment to remain competitive in a tough operating environment.

With WOW trading on 24.5x FY20F PE and 3.0% yield, we see the stock as fully valued and maintain our Hold rating. 

 

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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