Coles Group: Cycling COVID lockdowns

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Alex Lu
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By Alex Lu
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Date posted:
22 February 2023, 8:00 AM
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  • Coles Group’s (ASX:COL) 1H23 EBIT was above our forecast but was driven by lower-than-expected D&A. At the EBTDA level, the result was broadly in line with our expectation.
  • Supermarkets EBIT increased 11% (+10% vs MorgansF) while Liquor fell 19% (- 12% vs MorgansF). The sale of Express to Viva Energy is expected to complete in 4Q23 with customary conditions such as ACCC and FIRB clearances received.
  • Management said Supermarkets volume growth returned to modestly positive from mid-January and is expecting more customers to be value conscious as cost-of-living pressures increase.
  • We make minimal changes to FY23-25F group underlying EBIT with upgrades to Supermarkets offset by downgrades to Liquor and the removal of Express. Our target price stays broadly unchanged at (login to view) and we maintain our Add rating.

1H23 result

1H23 underlying EBIT (incl. Express) increased 14% to $1,114m (+12% vs MorgansF and +8% vs Visible Alpha consensus) and underlying NPAT jumped 17% to $643m (+16% vs MorgansF and +11% vs Visible Alpha consensus).

With revenue and EBITDA broadly in line with our forecast, the beat at the EBIT line was due to lower-than-expected D&A.

COL continues to progress its major automation projects with Witron and Ocado. While implementation opex was only $17m in 1H23, this is expected to ramp up to ~$120m for FY23 (vs ~$140m previously) - hence a large skew to 2H23.

The Ocado project in NSW has been delayed (commissioning expected in 2H24) but is currently not expected to have a material impact on capex.

Divisional summary

Supermarkets like-for-like (LFL) sales lifted 4.9%, which was above our 2.7% forecast. Volumes improved through the half after cycling elevated demand in the pcp from lockdowns in NSW, VIC and the ACT, although COL said supply challenges remained across many categories (fresh and frozen produce, pet food, eggs and poultry) due to flooding, cooler weather, production challenges, and rail outages.

COL’s Own Brand sales rose 7.1%, which was above the Supermarkets average growth rate (+4.6%), suggesting some trading down from customers. In line with commentary from other retailers, online sales fell 6.6% with penetration down to 7.2% vs 8.2% in the pcp as customers returned to shopping in store. 

Liquor LFL sales dropped 2.3%, which was better than our -4.3% forecast, reflecting the cycling of elevated demand for at-home consumption in the pcp due to lockdowns. EBIT fell 19% (-12% vs Morgans) due to the operating deleverage from lower sales, higher wage costs, and investments in digital and stores.

Management expects Liquor to return to earnings growth in 2H23 (MorgansF +4%) after no longer cycling COVID-impacts and a focus on building sales momentum.


Management noted that Supermarkets volume growth returned to modestly positive from mid-January and is expecting more customers to be value conscious as cost-of-living pressures increase. 

COL said supplier input cost pressures remain, particularly in packaged goods, wages and energy. However, inflation is expected to moderate from peak levels in 2Q23 as the business cycles 2H22 inflation and farm-related availability improves.

Changes to earnings forecasts

Our FY23-25F underlying EBIT forecasts remain largely unchanged with upgrades to Supermarkets offset by downgrades to Liquor and the removal of Express.

Investment view

On the back of minimal changes to earnings forecasts, our equally-blended (DCF, SOTP, PE) target price remains broadly unchanged at (login to view). 

Trading on 22.5x FY24F PE and 3.6% yield, we continue to see COL as offering good value with the company’s healthy balance sheet and defensive characteristics putting it in a good position to navigate through a weaker economic environment.

In our view, the unwinding of local shopping trends should continue to be a tailwind and further trading down from consumers will also be positive given COL’s strong Own Brand offering. Add rating retained.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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