Coles Group

Coles Group (CGJ) has a reduced share price target of $15.21 (down 21 cents) from stock analyst UBS. An independent expert values Coles at $16.21-$18.23: Despite the WES offer not being in the fair value range, the Independent Expert (IE) has advised that the offer is in the best interests of shareholders in the absence of a superior proposal. On July 2, the CGJ Board recommended the offer subject to the IE determining the offer was fair & reasonable. In the analyst's view this highlights the lack of alternatives the Board has. CGJ shareholders might extract some of this potential value under WES ownership. Coles reports FY07 results on Wednesday September 19th: NPAT guidance is "in the order of $787m". They forecast FY07 NPAT to be $769m versus consensus at $774m. A final dividend of 25cps has already been declared. The analysts believe 2H07 performance of Food & Liquor (F&L) is more important than the reported NPAT number. 4Q07 F&L like-for-like (LFL) sales growth & any commentary on more recent trading will be key. They would not be surprised to see a 4Q07 sales growth worse than our +1% forecast. More importantly the market should focus on the leverage impact on margins from the weak sales growth. They are forecasting a 39bps decline in 2H07. Other features to focus on will be 2H working capital position, capex & operating cashflow. Payment of cash provisions for redundancies will impact operating cashflow. They have reduced our price target by 7cents to $15.21. Our valuation is equal to our price target and is based on the implied value of the WES offer. Read a previous Coles Group (CGJ) recommendation, and another CGJ stock recommendation.

Coles Group (CGJ) have a Neutral 2 shares recommendation and an unchanged price target of $15.90 from market analyst UBS. The company reported H1 07 EBIT of $737.5m or $675m pre one-offs versus the analyst's $699m est. Underperformance was mainly due to Kmart. Food & Liquor companies are declining further into Q3 07 with Bi-Lo rebadge failing to lift sales. Cash generation was weak. FY 07 & FY 08 guidance was reiterated but this requires faith in improved execution, in their view. The analyst's revised FY07E NPAT is $755m or 4% below guidance. Their FY08E forecast of $930m implies 23% growth but is still below CGJ's guidance of $944m. A thorough consideration of ownership options including full or partial sale/demerger of all or some businesses should ensure greatest bidding tension for CGJ. Despite the Chairman citing $15.25 as substantially undervaluing CGJ, the analyst believes this may change if deteriorating trading continues. CGJ believe the sale process may take close to 6 months but given the Myer experience we believe it may take longer. Their $15.90 price target is unchanged & assumes some form of corporate action. It is based on the average of their passive valuation & bull-case LBO. The market analyst continue to prefer Woolworths (WOW) over Coles Group (CGJ) given WOW's superior execution & uncertainty over CGJ's ownership & operational outlook.

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.