This report is an updated version of the report published on 10 May 2022 at 3:40 PM GMT.

Coles Group Limited

Coles Group Limited (ASX: COL) is a retailer of fresh food, groceries, general merchandise, fuel, liquor, and financial services. The company operates through a network of retail stores in Australia besides the online platform.

Q3FY22 Update: In Q3FY22, COL achieved sales revenue of $9.08 billion as compared to $8.76 billion in Q3FY21, depicting a growth of 3.6%. Supermarkets and Liquor sales surged by 3.9% and 2.9%, respectively. While sales at its Express segment tumbled by 2.2% YoY. COL incurred $65 million towards COVID-19 related costs in contrast to $10 million incurred last year. It is on track to deliver Smarter Selling benefits in excess of $200 million in FY22.

The following picture gives a broader idea of the financial performance in 1HFY22:

Financial Summary (Source: Analysis by Kalkine Group)

Key Risks: The company’s business growth could be impacted by uncertainties in relation to the COVID-19 pandemic. In addition, the disruption in demand & supply could also pose an operational risk to the business.

Outlook: Looking forward, the company would continue to focus on providing trusted value for customers, including through exclusive to Cole’s products, in spite of increasing cost pressures.  For FY22, the company expects capital expenditure in the range of $1.0 billion to $1.2 billion.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks

Stock Recommendation: The stock of COL is trading above its 52-week low-high average of $15.670 - $18.940, respectively. The stock has provided returns of ~+13.08% over the past three months. The stock has been valued using the P/E multiple-based illustrative relative valuation and arrived at a target price with a correction of high-single-digit (in % terms). The company can trade at a slight discount to its peers, considering the lockdown impact on store closures and supply concerns. For this purpose of valuation, peers such as Woolworths Group Ltd (ASX: WOW), Metcash Ltd (ASX: MTS), Wesfarmers Ltd. (ASX: WES), and others have been considered. Considering the near-term risk of increasing virus spread and its impact on store operations, solid rally in the stock price in past months, current trading levels, the downside as indicated by the valuation, and key risks associated with the business, we advise investors to book profit and give a ‘Sell’ rating on the stock at the current market price of $18.850 as on 10 May 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia.

COL Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Disclaimer

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