Coles Placement - Selldown from Wesfarmers Expected but Discount Is Narrow at the Top

Coles Placement - Wider Discount to Account for Overhang

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. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

Download the Morningstar Fact Sheet : http://corporate.morningstar.com/US/documents/MarketingFactSheets/AboutMorningstarFactsheet.pdf

Equity Bottom-Up

At our fair value estimate of AUD 13.30, <a href="https://www.smartkarma.com/entities/27799" target="_blank" data-smartkarma-citation="entities:27799:1">Coles Group Ltd (COL AU)</a> offers investors an attractive 5.1% annualised dividend yield, fully franked, underpinned by a relatively defensive income stream. However, intense competition stifles dividend growth. At a constant payout ratio of 90%, we estimate dividends to increase in line with underlying NPAT at an average rate of only about 4% per year.An investment in Coles is essentially an investment in the Australian supermarket sector. The Coles supermarkets segment accounts for 79% of the group's operating profits in fiscal 2019. As an established consumer staple retailer, we expect Coles’ cash flow volatility is much lower than for discretionary retailers and we ascribe a low uncertainty rating.For decades, today's market leaders Coles and <a href="https://www.smartkarma.com/entities/500" target="_blank" data-smartkarma-citation="entities:500:1">Woolworths Ltd (WOW AU)</a> gradually consolidated the Australian grocery retailing industry. However, Aldi's introduction of a hard discount channel in 2001 and rapid store-rollout reversed the trend, fragmenting the market. Other players have joined the party. Costco entered in 2009 and we anticipate Kaufland to be up and running before fiscal 2020 year-end. Amazon Australia could introduce AmazonFresh in the longer run.Despite this gloomy outlook for further competition, Coles is well positioned to defend its turf and EBIT margins given its sheer size. In the low-margin/high-volume food retailing game, scale and entrenched supply and distribution channels are key. We don't expect Costco, Kaufland, or Amazon to materially impact Coles' top line in the near to medium term. But longer term, the threat is significant, enough for us to ascribe a no-moat rating to the Australian supermarket giant. We assign the group a Standard stewardship rating. At current prices, shares in Coles screen as slightly undervalued.Analyst: Johannes Faul, CFA

At our fair value estimate of AUD 13.30, Coles Group Ltd (COL AU) offers investors an attractive 5.1% annualised dividend yield, fully franked, underpinned by a relatively defensive income stream. However, intense competition stifles dividend growth. At a constant payout ratio of 90%, we estimate dividends to increase in line with underlying NPAT at an average rate of only about 4% per year.An investment in Coles is essentially an investment in the Australian supermarket sector. The Coles supermarkets segment accounts for 79% of the group's operating profits in fiscal 2019. As an established consumer staple retailer, we expect Coles’ cash flow volatility is much lower than for discretionary retailers and we ascribe a low uncertainty rating.For decades, today's market leaders Coles and Woolworths Ltd (WOW AU) gradually consolidated the Australian grocery retailing industry. However, Aldi's introduction of a hard discount channel in 2001 and rapid store-rollout reversed the trend, fragmenting the market. Other players have joined the party. Costco entered in 2009 and we anticipate Kaufland to be up and running before fiscal 2020 year-end. Amazon Australia could introduce AmazonFresh in the longer run.Despite this gloomy outlook for further competition, Coles is well positioned to defend its turf and EBIT margins given its sheer size. In the low-margin/high-volume food retailing game, scale and entrenched supply and distribution channels are key. We don't expect Costco, Kaufland, or Amazon to materially impact Coles' top line in the near to medium term. But longer term, the threat is significant, enough for us to ascribe a no-moat rating to the Australian supermarket giant. We assign the group a Standard stewardship rating. At current prices, shares in Coles screen as slightly undervalued.Analyst: Johannes Faul, CFA

Coles Group Offers Steady Cash Flows But Little Growth; Initiating With No-Moat and AUD 13.30 FVE