Category: Global stocks

Global Stock refer to share that are traded on multiple exchanges with different currencies. For example, if a publicly-traded company issues shares in dollars on the New York Stock Exchange and in pounds on the London Stock Exchange, it is issuing global registered shares. Global stock to a portfolio offers diversification and may provide higher returns. Global stock markets may experience higher levels of volatility than other domestic markets with bigger swings to both the upside and downside.

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Global stocks Shares

Analysts estimate increase in Stifel Fair Value

Additionally, an initial need for capital in the recession and then low interest rates and a strong stock market led to high capital-raising activity.

Stifel Financial has a long history of being an active acquirer. With several hundred million dollars of arguably excess capital, the company could make some decent-size acquisitions. The company may see some growth from a renewed commitment to its independent advisor business.

Stifel has been deepening its expertise in certain niche areas lately through acquisitions. The KBW merger improved the company’s presence in financial industry investment banking, and Stifel has made a series of public finance firm acquisitions over the past several years. In wealth management, adding Barclays’ advisors can help the firm move more upmarket. The investment banking and wealth management landscape is undergoing a decent amount of change from regulations, such as those related to capital requirements and fiduciary standards.

Financial Strength:

Stifel’s financial health is fairly good. At the end of 2020, the company had approximately $1.1 billion of corporate debt and over $2 billion of cash on its balance sheet. Its next large debt maturity is $500 million in 2024.The Company’s total leverage is less than 8, which is fair considering the mix of its investment banking and traditional banking operations. At the end of 2020, Stifel was at its disclosed target of 11.9% Tier 1 leverage ratio. Given that its Tier 1 leverage ratio is above management’s previously stated target of 10%, the company would resume more material share repurchases or pursue acquisitions. 

Bulls Say:

Stifel’s string of acquisitions has increased operational scale and expertise. Stifel is an experienced acquirer and integrator. A recession could provide ample acquisition opportunities. Net interest income growth over the previous several years at the company’s bank materially expanded wealth management operating margins, and the increased size of the bank and wealth management business provides diversification with its institutional securities business.

Company Profile:

Stifel Financial is a middle-market-focused investment bank that produces more than 90% of its revenue in the United States. Approximately 60% of the company’s net revenue is derived from its global wealth management division, which supports over 2,000 financial advisors, with the remainder coming from its institutional securities business. Stifel has a history of being an active acquirer of other financial service firms.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

G8 Education Fair Value Cut to AUD 2.00 but Remains Materially Undervalued

Although the result contained several positive aspects, we now expect some of G8’s recent expenses growth to be permanent. This expectation results in a reduction in our long-term profit margin expectations, with our long-term underlying NPAT margin forecast falling to 12% from 14%.

The market reacted negatively to G8’s result, with the share price falling 6% on the day. G8 usually generates most of its revenue in the second half of the year which typically boosts profit margins. However, the company has been unable to increase prices as usual in the middle of this year, due to the pandemic, which will impact margins in the second half. G8’s prices have been unable to keep pace with wages growth over the past couple of years, partly due to lower immigration due to the pandemic. Although management have created strategies to address the scarcity of labour and labour productivity, these solutions have costs too. G8’s earnings are particularly sensitive to wage inflation because wages typically equate to around 60% of revenue and because G8’s margins are relatively small.

G8’s management said that attracting and retaining talent is the greatest challenge facing the sector. In July 2021, G8’s occupancy rate had recovered to just 1 percentage point below levels achieved in July 2019, before the pandemic. However, the coronavirus outbreak and related lockdowns have caused this gap to widen to 2.6 percentage points in August 2021, relative to August 2019. We expect the second half of 2020 will be tough for G8, with lockdowns likely to continue for most of the half. However, we also expect Australian vaccination rates to enter 2022 with 70% to 80% of the population likely vaccinated, paving the way for a permanent reopening of the country.

Although the latest childcare sector support measures are a positive for childcare centre operators, they only add to the complexity of forecasting G8’s near-term earnings. Aside from the complexity caused by the pandemic’s impact on occupancy rates and subsidies, G8’s earnings are also distorted by recent reshuffling of its childcare centre portfolio, re -categorisation of expenses, the ramp-up of new centres, and change to the definitions of key performance indicators, such as occupancy. This complexity may mean the market will remain wary of G8 shares until the expected recovery is evidenced in reported results, likely in late 2022.

Despite our lower fair value, at the current market price of AUD 0.99 per share, we continue to believe G8 is materially undervalued. Although the childcare industry faces turmoil in the near term and wage inflation pressures in the longer term, we still expect G8’s occupancy rates to recover in 2022 as the pandemic subsides. Importantly, G8’s decision to raise equity capital in 2020, and repay all its net debt, means the company is well placed to weather the latest lockdowns and will likely reinstate dividends in 2022. The reinstatement of G8’s dividends will be an important step for Australian tax residents, because they will likely be fully franked. Franked dividends are effectively a return of corporate tax to shareholders and the reinstatement of franked dividends, which we expect in early 2021, may be a catalyst for a rerating of the stock.

Company Profile

G8 Education operates a portfolio of around 480 childcare centres in Australia, implying a market share of around 8%. The company is highly dependent on government subsidies, which comprise around 60% of childcare fees, but we expect subsidies to continue growing with childcare demand. G8 does not own the buildings from which its childcare centres operate, and labour costs comprise around 60% of expenses, with rental costs comprising around 15%.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Positive effect on Amcor stock as the company’s net income and free cash flow increase

  • Flattering exposure to the growth of both emerging and developed markets.
  • A well-defined strategy for increasing shareholder value.
  • Acquisitions that are bolt-ons provide an opportunity to supplement organic growth.
  • A strong balance sheet.
  • Leveraged against a falling AUD/USD
  • Advantages from the recently finished Bemis acquisition will begin to flow.
  • Capital management initiatives include a $500 million share buyback currently underway.

Key Risks

The following are the key challenges to the investment thesis:

  • Management fails to realise the proposed synergies in the Bemis transaction.
  • Increasing competition causing margin erosion and potential balance-sheet stress (e.g. reduced earnings leading to potential debt covenant breaches).
  • Cost constraints on inputs that the company is unable to pass on to customers (even though the Company does pass through input costs).
  • Global economic growth has slowed.
  • Value-destroying acquisition.
  • The risk of emerging markets.
  • Unfavorable movements in the AUD/USD.

Highlights of key FY21 results

  • EBIT increased by 8% to $1,621 million, with margins enhancing by +60 basis points to 12.6 percent. 
  • GAAP net income of $939 million, a +53 percent increase, translates to GAAP EPS of 60.2 cents, a +58 percent increase (or adjusted EPS of 74.4 cents, a +16 percent increase on a CC basis, above guidance range).
  • Adjusted FCF of $1.1bn, flat -9.9 percent over pcp (albeit at the upper end of guidance range), effected by rising capex on organic growth projects, lower working capital benefit, and adverse tax payment timing compared to pcp.
  • Return on average funds employed of 15.4 percent, an increase of +140 basis points over the pcp. 
  • The Board declared a final dividend of 11.75 cents per share, bringing the full-year dividend to 47 cents per share, and repurchased $350 million (2% ) of outstanding shares.

Company Description 

Amcor Limited (AMC) is an international integrated packaging company offering packing and related services. Amcor primarily produces a wide range of packaging products which include corrugated boxes, cartons, aluminum and steel cans, flexible plastic packaging, PET plastic bottles and jars, and multi-wall sacks. The company has operations in Australasia, North America, Latin America, Europe and Asia.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Cleanaway’s Asset Acquisition of Suez in F.Y.22

Close-up LED charts and summary info for making stock trading graph

 It is clear about Cleanaway’s growth into materials recovery which features more favorable economics than waste collection. Under its “Footprint 2025” capital allocation strategy, the group will continue to focus investment in materials recovery and waste-to-energy, or WTE. 

Since fiscal 2016, Cleanaway has invested in excess of AUD 100 million in Greenfield materials recovery, waste treatment, and WTE projects. The recent purchase of the materials recovery assets of SKM Recycling represents a further step toward Cleanaway’s goal of moving further into the industry’s midstream.

Further diversifying Cleanaway away from waste collection is the acquisition of Toxfree in late fiscal 2018, skewing Cleanaway’s earnings stream away from collections, the most competitive segment of the waste management value chain.

Financial Strength

Cleanaway has made further progress on its proposed AUD 501 million acquisition of key Australian post-collection assets from Suez, securing new debt facilities which will allow the deal to be fully debt funded. Therefore, balance sheet flexibility post deal completion exists should further acquisition opportunities arise. Cleanaway’s liquidity position is more than ample to secure the business’ operations without external financing through the medium-term. With minimal debt maturities over the fiscal 2021-24 period, Cleanaway’s sources of cash—those being cash at bank, undrawn debt and operating cash flow–are more than sufficient to fund Cleanaway’s ongoing operations. Cleanaway’s earnings exhibit little volatility through the economic cycle. As a result, its conservatively positioned balance sheet provides ample flexibility for further capital allocation to materials recovery and waste disposal assets —whether bolt-on or Greenfield–under Cleanaway’s Footprint 2025 strategy. 

Bull Says

  • Cleanaway is benefiting from industry consolidation.
  • Municipal waste contracts provide relatively stable cash flows through the economic cycle.
  • Capital allocation improved markedly under outgoing CEO Vik Bansal’s guidance.

Company Profile

Cleanaway Waste Management (ASX: CWY) is Australia’s largest waste management business with a national footprint spanning collection, midstream waste processing, treatment and valorization, and downstream waste disposal. Cleanaway is active in municipal and commercial and industrial, or C&I, waste stream segments and in nonhazardous and hazardous liquid waste and medical waste streams following the acquisition of Toxfree in fiscal 2018. While Cleanaway is allocating greater capital to midstream waste processing and treatment, earnings remain skewed toward waste collection. Cleanaway is particularly strong in C&I and municipal waste collection with strong market share in all large Australian metro waste collection markets.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Orora Limited (ASX: ORA)

  • Exposure to the growth of both developed and emerging economies.
  • Headwinds in the near term should be factored into the price.
  • Following a recent strategic assessment, the strategy has been revised.
  • Bolt-on acquisitions (and the synergies that come with them) can help complement organic growth.
  • Leveraged against the AUD/USD and is now declining.
  • Corporate activities that could occur.
  • Management of capital (current on-market share buyback plus potential for additional initiatives).

Key Risks

  • Margin loss due to competitive forces.
  • Cost pressures in the supply chain that the company is unable to pass on to customers.
  • Economic conditions in the United States, emerging markets, and Australia are deteriorating.
  • Risk associated with emerging markets.
  • Adverse Movements in AUD/USD exchange rates 
  • OCC prices are decreasing.

FY21 group result highlights

Group revenue was slightly down (-0.8 percent) to $3.5 billion (up +7.8% in constant currency), operating earnings (EBIT) were up +11.6 percent to $249.1 million (up +17.3 percent in CC), underlying NPAT was up +23.7 percent to $156.7 million, EPS was up +29 percent to 16.9 cents (also driven by the on-market share buyback), and the full year dividend of 14cps up +16.7% on pcp. 2) Balance sheet. The impact of the on-market share buyback boosted leverage from 0.9x to 1.5x. Leverage, on the other hand, is still far below management’s goal range of 2 – 2.5x.

Company Description 

Orora Limited (ORA) provides packaging products and services. Orora is a global packaging manufacturer, distributor and visual communication solutions company The Company offers fibres, and glass and beverage can be packaged materials in Australia and Asia and packaging distribution services in North America and Australia.   

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

Morrisons’ Strong Balance Sheet and Store Estate Attracts Private Equity Interest

Although operating margins in the grocery industry are similar among the Big Four, we reckon Morrisons has a more efficient operating cost structure than Tesco and Sainsbury’s. It also has a stronger balance sheet than its Big Four peers.Morison It has large-store exposure, with no convenience-store presence and an online channel growing through third-party partnerships (Ocado and Amazon). Its strategy is centred on driving traffic in stores through the provision of additional services such as hand car washes, tyre change concessions, and parcel pickup services on top of a stronger core food offering. The company targets higher exposure in growth channels through capital-light partnerships in wholesale (Amazon, McColl’s, LuLu), online (Ocado), and convenience (Rontec forecourts). Although we believe management’s plan makes sense in the current market environment, it highlights the company’s limited channel exposure in an increasingly multichannel world. We view the company’s channel positioning as problematic despite the new initiatives, especially in a period of balance sheet deleveraging and tighter capital expenditure budgets (making it hard for the firm to develop its own convenience-store network)

On Aug. 19 Morrisons reached an agreement for a recommended cash offer of GBX 285.00 per share by Clayton, Dubilier & Rice Funds, or CD&R, a private equity fund, which implies a premium of about 60% to the closing price on June 18 (last business day before possible offer by CD&R) and an enterprise value multiple of 9 times the grocer’s underlying EBITDA or about 20.7 times Morrisons’ underlying EPS. The offer is equivalent to a cash consideration of approximately GBP 7.00 billion on a fully diluted basis. Morrisons’ board intends to recommend unanimously that shareholders vote in favour of the takeover, to be proposed at the general meeting in the week commencing Oct. 4.We intend to increase our GBX 252.00 fair value estimate to reflect the most recent offer. 

We think the current offer is very generous for Morrisons’ shareholders. In our estimates, the value the new owner can successfully extract from a potential monetization of the grocer’s vast store estate could be about GBX 70.00 per share. We believe, at these levels, the new owner could still achieve good returns on invested capital but only by realizing significant structural cost savings and leveraging up the balance sheet (Morrisons exhibits high capacity to leverage: net debt/EBITDAR ratio of about 2.4 times versus 3.4 times for Tesco and Sainsbury’s, excluding the banks).

Bulls Say

  • Morrisons is a well-managed company with one of the most efficient operating cost structures relative to peers.
  • The firm has good balance sheet and cash flow management. Working capital has been squeezed, selective store property sold off, and capital spending held in check.
  • Morrisons has a large freehold store estate.

Financial Strength

Morrisons is in reasonably good financial health, with low levels of net debt, a pension surplus, and modest levels of free cash generation. At the beginning of February 2020, net debt had been reduced to around GBP 1 billion which implies a net debt/adjusted EBITDA ratio of 2.4.Financial leverage has also been reduced through sales of freehold stores and disposals, which have generated close to GBP 1,000 million in proceeds in recent years..Capital spending remains moderate, and like other U.K. grocers, Morrisons is no longer in strong store-expansion mode. 

Company Profile

Founded by William Morrison in 1899, Wm Morrison Supermarkets is the U.K.’s fourth-largest grocery chain, with a market share of around 10%. The 2004 takeover of rival Safeway transformed the firm in terms of scale and gave it a significant presence outside its base in Northern England. The company operates about 500 stores, entirely in the United Kingdom. Morrisons has an online presence via a partnership with Ocado and Amazon and has lately been trying to expand its wholesale channel with new agreements (McColl’s).

(Source: Morning Star)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Cochlear’s FVE Up 9% Driven by a Stronger U.S. Dollar and Lower Expenses

Cochlear implants became the standard of care many years ago for children in developed markets with profound hearing loss or deafness. Large price differentials in the lower range of products result in 80% of revenue being earned in developed markets and 20% in tender-oriented emerging markets. Currently, penetration is still estimated to be under 5%, and Cochlear is at a pivot point as it invests to be adopted more widely by seniors with profound hearing loss. Prevalence of profound hearing loss increases over 65 years and has a steep increase from over 80 years of age. However, hearing aids, not cochlear implants, are the standard of care. Cochlear is investing significantly to grow awareness as well as funding research to support pay or reimbursement.

Financial Strength

The company has typically enjoyed low capital intensity and high cash conversion, affording it to pay out 70% of earnings as a dividend. However, with the confluence of operational weakness due to deferred elective surgeries as a result of the coronavirus, a peak in the capital cycle, and a patent infringement penalty becoming payable, the company faced a liquidity crunch. Consequently, it completed an AUD 850 million equity raise in fiscal 2020, adding an additional 10% to shares on issue and we forecast the company to carry no net debt for the foreseeable future. The company is not acquisitive and organic growth is driven by R&D spending of roughly 12% of revenue per year.

Wide-moat Cochlear’s fiscal 2021 underlying NPAT rebounded 54% to AUD 237 million following the resumption of elective surgeries. As vaccination rates increase, the firm anticipates a continued recovery and provided fiscal 2022 NPAT guidance of AUD 265 million-285 million. The guidance is based on a USD/AUD exchange rate of 0.74 and doesn’t factor in material disruption from COVID-19. Our fair value increases by 9% to AUD 175, driven by our forecast 0.72 USD/AUD exchange rate from 0.77 prior. We also decreased our long-term assumptions for the tax rate and R&D investment as a percentage of sales to 25% and 12%, respectively, from 27% and 13% prior. 

Fiscal 2021 implant sales grew 19% constant-currency on 15% growth in unit sales. Despite a much stronger USD, our revised fiscal 2022 revenue forecast of AUD 1,627 million implies just 9% growth on fiscal 2021. Shares still screen as overvalued with our forecast five-year revenue growth of 9% unchanged. Cochlear declared a final dividend of AUD 1.40 per share with full-year dividends representing a 71% dividend payout on underlying NPAT but unfranked as a result of fiscal 2020 losses.

Bulls Say’s 

  • Continued strong top-line growth is likely to be more challenging and dependent on growing penetration in emerging markets and adults in developed markets.
  • The more reliable annuitylike revenue stream from sound processor upgrades is forecast to contribute an increasingly larger proportion of group earnings as it is driven by a growing installed base.
  • The company enjoys low capital intensity and high gross margins and cash conversion, enabling Cochlear to afford a 70% dividend payout ratio in a typical year.

Company Profile 

Cochlear is the leading cochlear implant device manufacturer with around 60% global market share. Developed markets contribute 80% of group revenue where cochlear implants are the standard of care for children with severe to profound hearing loss. The company also actively targets the growing cohort of seniors in developed markets. Tender-oriented emerging markets contribute the remaining 20% of group revenue. Main products include cochlear implants, bone-anchored hearing aids, or BAHA, and associated sound processors. In fiscal 2020, 49% of revenue came from the Americas, 35% from EMEA, and 16% from the Asia-Pacific segment.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Raising Tesla’s FVE to $600 on Improved Long-Term Outlook for AV Software

the company went from a startup to a globally recognized luxury automaker with its Model S and Model X vehicles. In addition to luxury autos, the company also competes in the mid-size car and crossover SUV market with its platform that is used for Model 3 and Model Y vehicles. Tesla’s strategy is to maintain its market leader status as EVs grow from a niche auto market to reaching mass consumer adoption. Tesla also invests around 6% of its sales into R&D, focusing on improving its market-leading technology and reducing its manufacturing costs. The company will also move upstream into battery production, with a goal to reduce costs by over 50%. 

Tesla’s extended range EVs are already at range parity with ICE vehicles, which should improve further with plans for its batteries to improve energy density. Tesla also continues to increase its supercharging network, which consists of fast chargers built along highways and in cities throughout the U.S., EU, and China. Tesla also sells solar panels and batteries used for energy storage to consumers and utilities. As the solar generation and battery storage market expands, Tesla is well positioned to grow in this market. 

Financial Strength 

Tesla is in solid financial health as cash and cash equivalents exceeded total debt as of June 30, 2021. Total debt was roughly $9.4 billion, however, total debt excluding vehicle and energy product financing (non-recourse debt) was around $4 billion. Cash and cash equivalents stood at $16.2 billion as of June 30, 2021.To fund its growth plans, Tesla has used credit lines, convertible debt financing as well as equity offerings and credit lines to raise capital. In 2020, the company raised $12.3 billion in three equity issuances. 

We are raising our fair value estimate to $600 per share from $570 for narrow-moat Tesla following AI day. Our largest key takeaway from Tesla’s AI day was the progress that the company is making on its Level 3 autonomous vehicle software known as full self driving. The biggest change to our forecast is our long-term outlook for Tesla’s Level 3 autonomous vehicle software. The software, which is currently still in beta testing mode, appears to be closer to a rollout than we had expected. 

Dojo is the supercomputer that Tesla is using to train its AV software. However, over the next several years, the company plans to begin selling AI training to other companies using extra processing space. This should generate operating profits in line with software companies. Finally, Tesla plans to develop humanoid robots that can be used to perform dangerous or repetitive tasks, by creating a repurposed version of the same camera-based autonomous software that it is developing for cars in the humanoid robots, which will be programmed to perform simple tasks.

Bulls Say’s 

  • Tesla has the potential to disrupt the automotive and power generation industries with its technology for EVs, AVs, batteries, and solar generation systems.
  • Tesla will see higher profit margins as the company achieves its plan to reduce battery costs by 56% over the next several years.
  • Through the combination of its industry-leading technology and unique Supercharger network, Tesla offers the best function of any EV on the market, which will result in the company maintaining its market leader status as EV adoption increases.

Company Profile 

Founded in 2003 and based in Palo Alto, California, Tesla is a vertically integrated sustainable energy company that also aims to transition the world to electric mobility by making electric vehicles. The company sells solar panels and solar roofs for energy generation plus batteries for stationary storage for residential and commercial properties including utilities. Tesla has multiple vehicles in its fleet, which include luxury and mid-size sedans and crossover SUVs. The company also plans to begin selling more affordable sedans and small SUVs, a light-truck, semi-truck, and a sports car. Global deliveries in 2020 were roughly 500,000 units.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Estee Lauder’s Currency Sales Grew to $16.2 Billion

missing $16.5 billion estimate, as an increasing number of COVID-19 cases resulted in another round of store closures across Europe, Latin America, and Asia (excluding China). Even so, fiscal 2021 sales are 6% above fiscal 2019 revenue (adjusted for acquisitions), supported by Estee’s ability to pivot to ecommerce, which increased to 28% of fiscal 2021 sales, compared with 15% in 2019.

 The travel retail channel has remained surprisingly resilient, which increased to 29% of fiscal 2021 sales, versus 23% in 2019. While international travel is largely curtailed, domestic trips have been strong, particularly in China’s Hainan province. 

Other factors that helped the firm return to prepandemic sales levels despite continued store closures are Estee’s strong brands (which underpins its wide moat rating) and the firm’s expertise in developing compelling new products, with innovations representing 30% of fiscal 2021 sales, well above the 15% targeted by many consumer products companies. Skin care is well above prepandemic levels, but makeup continues to lag, as mask mandates curb demand. But the firm has promising innovations and marketing programs lined up that it will rollout as mandates relax.

Company’s Future Outlook

Fiscal 2021’s adjusted operating margin increased 420 basis points to 18.9%, given tight expense controls. This margin upside should continue into fiscal 2022, as management’s guidance for adjusted earnings per share of $7.23-$7.38 is above our $7.06 estimate, although sales growth guidance of 13%-16% brackets 15% estimate. No change is expected in $249 fair value estimate, as modestly higher operating margins should be offset by a higher tax rate, 

Company Profile

Estee Lauder Inc (NYSE: EL) is the world leader in the global prestige beauty market, participating across skincare (52% of 2020 sales), makeup (33%), fragrance (11%), and hair care (4%) categories, with popular brands such as Estee Lauder, Clinique, MAC, La Mer, Jo Malone, Aveda, Bobbi Brown, Too Faced, and Origins. The firm operates in 150 countries, with 26% of revenue stemming from the Americas, 44% from Europe, the Middle East and Africa, and 30% from Asia-Pacific. The company sells its products through department stores, travel retail, multi brand specialty beauty stores, brand-dedicated freestanding stores, e-commerce, salons/spas, and perfumeries.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

Coles display strong FY21 results benefitting from pandemic

  • Increasing the penetration of private labels – COL just reaffirmed its objective of 40% penetration.
  • Earnings that are relatively safe (food tends to be largely non-discretionary).
  • In comparison to key domestic competition Woolworths, the valuation is undemanding.
  • Now that the company has been demerged, it has improved its focus and capital allocation.
  • Automation and enhancements in the supply chain should result in increased efficiency.
  • The deal with Ocado, in our opinion, positions Coles as a leader in online delivery.
  • Flybuys is a highly appealing asset that may be profited from.

Key Risks

  • Margins could be eroded by significant competitive pressures (including the introduction of new companies).
  • At the forthcoming Strategy update in June 2019, management will reset the earnings base.
  • Disruption on the internet (full online offering).
  • Upgrades to automation and supply chains will necessitate major capital investment, the cost of which has yet to be determined.
  • After accounting for leases, the balance sheet could be extended.
  • Cost inflation is outpacing revenue growth.

FY21 Results Highlights

Strategic sourcing and Smarter Selling benefits drove a 35-basis-point increase in gross margin in the top supermarkets. Since the Company introduced Coles Plus in February 21, the number of paid members has climbed by 6 times. Coles’ market share recovered to pre-Covid-19 levels in the fourth quarter of 2011, with a 4Q21 exit market share of 27.1 percent. This is higher than the 26.4 percent recorded in 2Q20. 

Management attributed this to the relaxation of limitations, which resulted in increased shopping centre performance and a slowing of the local shopping trend. The Ocado Customer Fulfilment Centres (CFC) will open in Melbourne in FY23 and Sydney in FY24, according to management.  In the fourth quarter, omnichannel customers spent 2.2 times more than in-store only shoppers, according to the findings. Coles now offers sale-day home delivery in over 300 stores, as well as Click & Collect at over 500 locations. 

Management did not disclose any earnings guidance in terms of dollars. However, sales growth in the crucial Supermarkets business was muted in the first seven weeks of 1Q22 trading, with sales up 1% on a headline basis and up 12% on a two-year basis.

Company Description  

Coles Group Ltd (COL) is an Australian retailer (supermarket and liquor) that was spun off from Wesfarmers (WES) in 2007. Coles handled more than 21 million customer transactions on average each week as of 30 June 2018, employing over 112,000 team members and operating 2,507 retail stores across the country. Supermarkets, Liquor, and Convenience are the company’s three primary operating segments. The company will also keep a 50 percent share in the flybuys loyalty programme.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.