Woolworths reported FY12 net profit of $1.82 billion, down 14%, althogh this included a significant item of $366 million from the sale of Dick Smith. Citi’s core net profit after tax was up 3.6% to $2.2 billion which includes operating earnings from Dick Smith. It is the kind of result you would expect from one half of the most dominant supermarket duopoly in the world which is getting some unwelcome competition from the other half of the most dominant supermarket duopoly in the world. Fantastic market dominance, strong balance sheet but the compeition is eating away at the edges of the market dominance and this is only likely to continue. In the end, oligopolies revert to mean.
Goldman baiscally makes this point, noting that the balance sheet is sound but the days of easy dominance are probably over:
“WOW continues to generate strong returns and its balance sheet provides
capital management potential in the medium term. However the key
Australia Food & Liquor business (83% of FY12 group EBIT) continues to
moderate. WOW currently trades at a 7% premium to the All Industrials ex
Banks 1-year-forward P/E of 14.2x. We think this represents full value, but
given the quality of the business franchise and the defensive earnings
profile – we retain our Neutral rating.”
With an earnings multiple of 15 times, the stock looks pretty highly valued for the current Australian market conditions. Goldman predicts earnings per share growth of 6.7%, which is reasonable but not really enough to justify an aggressive valuation. Citigroup likes New Zealand, doesn’t like food and liquor:
“Positives – 1) New Zealand margins up 83bp in 2H: The NZ Food & Liquor
business had a very strong 2H with earnings up 27%, primarily through higher gross
margins. 2) Big W margin surprise: Big W’s EBIT margin expanded in 2H12
despite weak sales. Currency benefits are likely a factor.
Negatives – 1) Soft 2H12 Food and Liquor margins in Australia: EBIT margins
only expanded by 4bp in 2H12 versus up 15bp in 1H12. The negative operating
leverage from slower sales hurt margins. 2) Masters loss of $100m: Master’s
losses were in line with expectations and will persist for another year at least.
3) Dick Smith provision increased: Another $120 million provision was taken on
Dick Smith’s exit, but no acquirer was announced.”
UBS also has a neutral rating, identifying the problems that comes with being an oligopoly:
i) Store cannibalisation – From the accelerated store roll-out, UBSe -0.8% real LFL in Aust. supermarkets in FY13; ii) Rising costs – While well controlled in FY12 we expect pressures to emerge in FY13 and; iii) CAPEX – Guidance for FY13 was above prior guidance
due to a 91% y/y lift in refurbishment CAPEX and could take time to yield
returns.
JP Morgan has an overweight call, mainly because it likes the strategy. And the magic word “defensive” is in there:
The broader turnaround plan for WOW is ongoing, and we
believe recent announcements suggest new management is executing on its
strategic plan. Indeed, recent trading suggests momentum is improving.
Furthermore, the company enjoys a defensive earnings stream with an ongoing
focus on cost reduction.
It is not really a stock to avoid if investors want to be in the Australian market for the long term. But it is valued pretty aggressively and with a net dividend yield of about 4.3% there is a reliance on some decent capital gain. That may be hard to get in what is becoming a more competitive duopoly.