Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

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Thematic (Sector/Industry)

The Australian grocery industry continues to evolve and everyday dry groceries are likely to become even more commoditised. Aldi re-established the discount channel in Australia and is forecast to ultimately capture close to 10% market share. On this premise, we have re-examined our assumptions on market share and profitability for the Australian supermarket sector and conclude EBIT margins are expected to tighten further. Price competition has heated up as the two dominating players, <a href="https://www.smartkarma.com/entities/500" target="_blank" data-smartkarma-citation="entities:500:1">Woolworths Ltd (WOW AU)</a> and Coles, expand their everyday low price lines to preserve market share. The price cutting has resulted in food price deflation and tightening of operating margins, especially at Woolworths. Coles plans to pass on efficiency gains to consumers by ongoing price cutting, and we expect Woolworths to follow suit, effectively capping operating margins of their supermarket businesses at sustainable levels of 4%. <a href="https://www.smartkarma.com/entities/14632" target="_blank" data-smartkarma-citation="entities:14632:1">Metcash Ltd (MTS AU)</a> network of independent retailers is exposed to the same dynamics, and is continuing with its Price Match programme. However, IGA stores are less able to compete on price than their integrated competition and we expect the network to continue losing a disproportionately high amount of share. On top of the near-term challenges, we identify two conceivable longer-term threats. The potential entry of discounter Lidl or online grocer AmazonFresh, or both, would introduce further pricing tension and increase pressure on margins even more.These key changes lowered <a href="https://www.smartkarma.com/entities/500" target="_blank" data-smartkarma-citation="entities:500:1">Woolworths Ltd (WOW AU)</a>' fair value estimate to AUD 22 from AUD 28. We reduced <a href="https://www.smartkarma.com/entities/1104" target="_blank" data-smartkarma-citation="entities:1104:1">Wesfarmers Ltd (WES AU)</a> fair value estimate to AUD 39.00 per share from AUD 42.00, predominantly due to lower margin estimates. For <a href="https://www.smartkarma.com/entities/14632" target="_blank" data-smartkarma-citation="entities:14632:1">Metcash Ltd (MTS AU)</a>, we have materially increased our fair value estimate to AUD 1.80 from AUD 1.10 due to a much-improved outlook on IGA's market shareAnalyst: Johannes Faul, CFA

The Australian grocery industry continues to evolve and everyday dry groceries are likely to become even more commoditised. Aldi re-established the discount channel in Australia and is forecast to ultimately capture close to 10% market share. On this premise, we have re-examined our assumptions on market share and profitability for the Australian supermarket sector and conclude EBIT margins are expected to tighten further. Price competition has heated up as the two dominating players, Woolworths Ltd (WOW AU) and Coles, expand their everyday low price lines to preserve market share. The price cutting has resulted in food price deflation and tightening of operating margins, especially at Woolworths. Coles plans to pass on efficiency gains to consumers by ongoing price cutting, and we expect Woolworths to follow suit, effectively capping operating margins of their supermarket businesses at sustainable levels of 4%. Metcash Ltd (MTS AU) network of independent retailers is exposed to the same dynamics, and is continuing with its Price Match programme. However, IGA stores are less able to compete on price than their integrated competition and we expect the network to continue losing a disproportionately high amount of share. On top of the near-term challenges, we identify two conceivable longer-term threats. The potential entry of discounter Lidl or online grocer AmazonFresh, or both, would introduce further pricing tension and increase pressure on margins even more.These key changes lowered Woolworths Ltd (WOW AU)' fair value estimate to AUD 22 from AUD 28. We reduced Wesfarmers Ltd (WES AU) fair value estimate to AUD 39.00 per share from AUD 42.00, predominantly due to lower margin estimates. For Metcash Ltd (MTS AU), we have materially increased our fair value estimate to AUD 1.80 from AUD 1.10 due to a much-improved outlook on IGA's market shareAnalyst: Johannes Faul, CFA 

Aldi's Presence Makes a Return to Duopoly-Like Margins Unlikely

Founder Evidente. Top rated quantitative analyst, Evidente

Sam Ferraro

Founder Evidente. Top rated quantitative analyst

Evidente

Evidente is an independent financial education firm that delivers innovative financial advice to wholesale investors, including active long only funds, hedge funds, pension funds, and sovereign wealth funds, in Australia and globally.  Drawing on academic research in asset pricing, behavioural finance and portfolio construction, Evidente provides wholesale investors with commercial solutions to stock selection and asset allocation decisions across equities and other asset classes.

<ul><li>In the past week, two bottom up developments have dominated the financial market news flow in Australia: the belated announcement of CEO succession at Woolworths and renewed concerns that Australian banks represent a 'big short' thanks to rumours of the imminent collapse of residential house prices. </li><li>The losses announced by Woolworths in its home improvement division this week and decision to exit the business altogether serves as a timely and powerful signal to other companies about the dangers associated with investing for growth in the current environment of deficient demand.  Corporate Australia has already taken heed, with the economy on the precipice of a capex cliff.  The recently released ABS survey of capex intentions points to a 20% slide in business investment in the current financial year, which would represent the largest annual decline in over 25 years.</li><li>Any bubble talk around housing discounts the important role that dwelling investment and household consumption still has to play to support the outlook while the economy is on the precipice of a capex cliff.  Against the backdrop that interest rates will remain low for an extended period (and likely move lower from here), if there is a bubble in Australian housing it might well persist.  To take a cue from John Maynard Keynes, hedge funds seeking to capitalise on Australia's 'big short' will probably need an abundance of patience (and capital).</li></ul>

In the past week, two bottom up developments have dominated the financial market news flow in Australia: the belated announcement of CEO succession at Woolworths and renewed concerns that Australian banks represent a 'big short' thanks to rumours of the imminent collapse of residential house prices. The losses announced by Woolworths in its home improvement division this week and decision to exit the business altogether serves as a timely and powerful signal to other companies about the dangers associated with investing for growth in the current environment of deficient demand.  Corporate Australia has already taken heed, with the economy on the precipice of a capex cliff.  The recently released ABS survey of capex intentions points to a 20% slide in business investment in the current financial year, which would represent the largest annual decline in over 25 years.Any bubble talk around housing discounts the important role that dwelling investment and household consumption still has to play to support the outlook while the economy is on the precipice of a capex cliff.  Against the backdrop that interest rates will remain low for an extended period (and likely move lower from here), if there is a bubble in Australian housing it might well persist.  To take a cue from John Maynard Keynes, hedge funds seeking to capitalise on Australia's 'big short' will probably need an abundance of patience (and capital).

What the Capex Cliff Means for Australia's 'Big Short'

Australia

Pental Limited manufactures and distributes personal hygiene products.  The Company's products include soaps, bath and shower gels, and oral care products. Pental also manufactures and distributes cleaning products for the laundry and kitchen.

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Pental Ltd (PTL AU)

Aldi's Presence Makes a Return to Duopoly-Like Margins Unlikely

The Australian grocery industry continues to evolve and everyday dry groceries are likely to become even more commoditised. Aldi re-established the...

Morningstar, Inc.

What the Capex Cliff Means for Australia's 'Big Short'

In the past week, two bottom up developments have dominated the financial market news flow in Australia: the belated announcement of CEO...

Sam Ferraro

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