Coles Group (CGJ) Share Trading Recommendation

Submitted by Craig Strzelecki on 26 February, 2007 - 06:23

Coles Group (CGJ) could see value in the $16.00–16.50 share range from analyst Macquarie Research Equities (MRE), depending on capex assumptions and exit multiples. They have observed the Coles Group shares surge by almost 10 percent on Friday after the company announced it would commence a process to review ownership options for the company and its businesses, after announcing a 10 percent downgrade to their 2008 earnings. The company also announced it will scrap its planned $20 billion break up if there is a knockout takeover bid for the entire company. Solomon Lew, Tesco, Carrefour and Walmart all being touted as potential buyers, not excluding private equity firms. When Coles rejected the KKR late last year, it was on the grounds the offer ($15.25 share) substantially undervalued the company. The board refused to grant access to the books. Now the board is prepared to initiate a formal process, governed by strict protocols, to ensure a rigorously competitive process to receive and assess proposals from interested parties. This means that credible suitors, most likely, will be able to look at the books before determining a view on value. This is a complete back flip on the KKR offer. 2Q07 Food and liquor comps (for the Coles brand only) declined to 2.6% (1Q07 3.2%). Management blamed ‘fresh and value’ as the reasons for the poor comps. It needs to improve its fresh proposition and invest more value into the offer particularly following the Christmas trading period. Management revealed it expected 1H07 NPAT would be $501m in line with the adjusted 1H06 result. Woolworths is hardly blameless when it comes to Coles' failure. Woolworths sustained customer perception that it has the lowest prices despite Coles’ focus on price all last year through its rollback and multi-buys campaigns. Having buried Coles, Woolworths has recently redefined its positioning statement, shifting its focus from price back to fresh. The primary attribute of its tag line is now 'you can count on the fresh food people', whereas previously it had been 'low prices you can count on everyday'. In five out of seven, unidentified packaged grocery categories, measured at four different points in time, (the most recent data point December 2006) Coles' category growth rate relative to industry category growth rates was less than 1.0x and declining. Why? Coles doesn't know why otherwise they would have fixed it! Woolworths has a great business model, unique market position and favourable industry dynamics. Coles is for sale and won't continue in its current form. Whether any part of it remains listed will depend on bidder interest. MRE have rerun their LBO models as think it is most unlikely a trade buyer will pay up. What can an LBO bidder pay? Depending on capex assumptions and exit multiples MRE see value in the $16.00–16.50 share range. Upside might exist if the non food businesses. Woolworths is the major beneficiary as Coles continues to lose market share. MRE expect earnings upgrades to occur from the market for WOW as this market share loss continues.

Coles Group Limited is listed on the Australian Stock Exchange (ASX) under stock code CGJ. You can view their investor website here. The chairman of Coles Group is Richard Allert, AM and the CEO is John Fletcher. Coles Group Limited is one of Australia's largest retailers with more than 2,900 stores throughout Australia and New Zealand. With over 350,000 shareholders, more than 165,000 employees. The company carries the following retail brands: Coles, Bi-Lo, 1st Choice Liquor Superstore, Liquorland, Vintage Cellars, Officeworks, Target, K-Mart, Harris Technology and Pharmacy Direct. Find out the meaning of the recommendations in this primer. CGJ was listed on the ASX on 24 September, 1929. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade CGJ. Check your charts and good luck with your share trading!

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