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Where Is the Growth Coming for Woolworths Group Ltd?

Jordan Baird

Jordan Baird is the head ASR Wealth Advisers client services desk and has been with the organisation since 2017. He first started investing in his early years. While he believes that investors should leave no stone unturned he has a particular interest in trading based on broad macroeconomic trends along with specific analysis of innovative up-and-coming companies.

Woolworths Group Ltd (ASX: WOW) has a market capitalisation of $A43.4 billion. Woolworths has around $A60 billion of sales annually. This represents around 20 per cent of retail sales in Australia. In terms of food and grocery sales, Woolworths market share is around 37 per cent compared to Coles market share of 29 per cent.

woolworths-WOW-price

How has Woolworths been doing recently? 

In the last few years, Woolworth has closed down the Master hardware business in 2016, sold the petrol retail business (completed in April 2019) and is currently downsising the Big W business by closing stores (around 30 over the next 3 year). In addition, it announced on 3 July 2019 plans to divest the Endeavour Group. These businesses represent around 30 per cent of Woolworth’s earnings before interest and tax (EBIT). The sale is expected to occur in 2020. The sale could by way of a trade sale to another party or through a demerger (so Woolworths shareholders will also own shares in the newly listed company called Endeavour Group).

 

What is the effect for Woolworths?

This is a positive development for Woolworths. Woolworth’s business becomes increasingly simplified and focused on supermarkets. Also, this should enable Endeavour Group to realise its full potential and seek out greater access to capital to stimulate further investment.

Woolworths could be of interest to investors looking for a defensive stock. This means stocks with comparatively stable earning and dividends. Woolworths growth should be underpinned by further population growth of around 1.5 per cent annually and running the existing business better than their competitors.

 

What does the future look like for Woolworths?

However, there appears little scope to grow the business through acquisitions in Australia as any material acquisition is likely to raise competitions concerns and could be blocked by the ACCC. It is also noted that Woolworths typically trades on a P/E ratio in the mid-20’s and generally at a premium to Coles (with a P/E ratio around 20) so the market considers that Woolworths currently has stronger growth potential than Coles. There is a risk this view could swing the other way if Coles starts to outperform Woolworths.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978) (“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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