WOW

Sharemarket analyst Macquarie Research Equities have provided a 2007/2008 Australian Budget Impact statement. Investors who had been eagerly awaiting the release of the 2007-2008 Budget were last night greeted with a host of initiatives that included a significant boost to household disposable income.

Woolworths Limited (WOW) has a Buy 1 recommendation and a price target of $30.30 per share from sharemarket analyst UBS. All divisions of Woolies bar Hotels reported stronger growth rates than those of the 2Q. Food & Liquor posted 6.6% like-for-like (LFL) growth despite declining inflation. BigW was the standout with LFL up 6.0% after adjusting for benefit from earlier Easter. This compares to 1.1% last quarter. NZ grew 4.9%, Hotels 1.5% and Consumer Electronics (CE) 7.5%. WOW confirmed FY07 sales guidance of 8-12% growth.The analyst has put through minor upgrades to some of our 4Q LFL forecasts to reflect the momentum we see across the divisions. They believe WOW & MTS will continue to benefit from disruption at CGJ. Our 12.4% sales growth forecast for FY07 is above guidance. WOW confirmed their interest in CGJ's general merchandise assets. Officeworks & Target hold most appeal in our view. The analyst thinks WOW would have less interest in Kmart. They note HVN delivered higher 3Q LFL growth (10.8%) than CE despite exposure to the weaker growth furniture category. Their price target for Woolworths Limited is derived by applying the cost of equity less dividends to our valuation. The free cash flow yield is rising as working capital & capex fall. This justifies the high PE in our view. WOW remains one of the sharemarket analyst's top picks in the sector along with HVN, BBG & MTS.

Meanwhile another analyst, Citigroup Investment Research has made some observations about Woolworths Limited. Woolworths 3Q07 sales show market share gains: WOW reported 3Q07 sales of $10.6 billion, growth of 8.8%. Volume growth in Food & Liquor accelerated in the quarter. Citigroup Investment Research (CIR) expect WOW's market share gains to continue until the end of 2007 given the problems at Coles. The analyst has slightly lowered its FY07e EPS by 0.2% and increased FY08e by 0.5% to reflect the timing of store openings. Market share gains accelerate; Food & Liquor comparable store sales growth accelerated to 6.6%, despite a reduction in inflation. The analyst estimates 1pp of the growth was a result of customers defecting from Coles and Bi-Lo stores. In addition, higher sales from the Action stores and the ramp-up of recently opened Dan Murphy's stores are driving comp store growth. Big W revival: Big W reported comp store sales growth of 6.0%, up from 1.1% in 2Q07. The dramatic recovery reflects WOW's decisive action to reduce the ranging in poor performing hard good categories and increase the focus on grocery items. Hotels gaming revenue declines to continue: Comparable gaming revenue is falling given QLD smoking bans introduced in mid-2006. Further bans will come into force in NSW and Victoria in mid-2007 and the analyst expects further deterioration in gaming revenue. Coles interest confirmed: Woolworths Limited confirmed it has lodged an expression of interest for Coles' general merchandise assets. The company is in a strong position given the PE premium for its shares and strong balance sheet. While Officeworks is a strong strategic fit, there is greater risk if WOW acquires Target, given fashion risk.

Shares analyst UBS have a look at which shares Outperform when the Australian dollar rises. The analyst: The obvious way to measure a share's currency sensitivity is to look at its EPS sensitivity. However, the shares analyst note that this ignores what else is going on when the Australian dollar (A$) is rising.

Last week, global markets stumbled following reports that China was looking to impose controls to curb its rapidly growing economy and concerns that a soft landing for the US economy may be more difficult than first thought. In the background, the Australian reporting season continued its final week, here are analyst Macquarie Research Equities (MRE) observations and thoughts. The HY December 2006 aggregate earnings reported for the market printed 1.5 percentage points below analyst expectations versus those held at the start of this reporting season.

Woolworths (WOW) has a Buy 1 share trading recommendation and a price target of $30.30 per share from analyst UBS. Analyst has observed the progress of Woolworths past the competition. 1H07 NPAT came in 3% above their estimate & consensus. The quality was very high with several one-off costs booked above the line. Australian Food & Liquor EBIT was 11% above their forecast, partially offset by weaker than forecast NZ Supermarkets, Big W and Consumer Electronics (post India costs). Guidance was lifted 4% to 20-24% NPAT growth. The analyst still sees upside to this given the momentum in F&L. They have upgraded Australian F&L margins again. They are now forecasting 6.0% margins in 2H07 (previously FY10) rising to 7.5% by 2012. They see further upside to short term earnings and cash flow as WOW moves into the harvesting phase post its project refresh capex program.The analyst DCF has risen to $32.39 driven by the increase in our free cash flow forecasts. Our price target is derived by applying the cost of equity less dividends to our valuation. The free cash flow yield is rising sharply as working capital and capex fall which justifies the high PE in our view. WOW remains one of our top picks in the sector along with HVN, BBG and MTS.