Woolworths: Slimming Down
About the author:
- Author name:
- By Alex Lu
- Job title:
- Date posted:
- 29 June 2021, 4:00 PM
- Sectors Covered:
- With the Endeavour Group (EDV) demerger now finalised, WOW has become a more simplified business with management able to focus on food and everyday needs.
- Following the demerger, WOW will have a very strong balance sheet with pro forma net cash of A$75m (pre-leases). Management have indicated their intention to return A$1.6-2.0bn to shareholders.
- We have removed Endeavour Drinks and Hotels from our earnings forecasts, resulting in FY22F EBIT falling by 23% to A$2,922m.
- Our target price falls to (login to view) and we maintain our Hold rating.
Endeavour Group (EDV) demerger complete
Woolworths (ASX:WOW) has finalised the demerger of Endeavour Group (ASX:EDV) after shareholders overwhelmingly approved the transaction at the general meeting on 18 June.
EDV is now trading as a separately listed entity with dominant market positions in retail liquor and hotels.
WOW has retained a 14.6% stake in EDV following the demerger to reflect the importance of the ongoing partnership between the companies. While WOW maintains the EDV demerger was not about distancing itself from the gambling industry, it does nonetheless make it much easier for WOW to exit its exposure entirely in the future by disposing of its minority interest in EDV.
WOW is now more streamlined
The separation of EDV will make WOW a more simplified business with a focus on food and everyday needs.
Key growth opportunities include new store openings and refurbishments, acceleration of digital and data capabilities, increased operational efficiency through supply chain investments, ongoing improvement in Big W, and expansion into adjacent markets (eg, pets, health, payments, wholesale, etc).
Post demerger, we estimate over 90% of WOW’s FY22F EBIT will come from the Australian Food (81%) and New Zealand Food (12%) divisions.
Removal of EDV earnings
We have removed Endeavour Drinks and Hotels from our earnings forecasts, resulting in FY22F EBIT falling by 23% to A$2,922m.
On a continuing basis, we forecast WOW’s FY21-24F EBIT to increase on average by 4% pa.
Given the size and form of the capital return remains uncertain, we are yet to factor this into our forecasts. However, we estimate a A$2.0bn buyback would be ~1% accretive to FY23 underlying EPS.
Maintain Hold rating
Maintain Hold rating on a lower target price (login to view) due to changes to earnings forecasts and an increase in our valuation multiple to 29x (vs 25x previously).
The higher multiple reflects the prospect of a capital return, elimination of ESG concerns (other than the 14.6% EDV stake), and lower earnings risk from COVID-19 related lockdowns (eg, Hotels).
Confirmation of A$1.6-2.0bn capital return.
FY21 result on 26 August 2021.
Upside risks to our valuation and target price include faster-than-expected Australian Food sales growth, higher EBIT margins and a quicker improvement in Big W earnings.
Downside risks include increased pricing intensity, more competitors entering the supermarket sector and a slowdown in sales momentum. COVID-19 disruption remains an ongoing risk.
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