Overview: Woolworths Limited (“Woolworths, the Company”) is an Australian diversified retail company that owns the Woolworths supermarket chain and other franchises with exposure to Food & Liquor, Petrol, Hotels, Merchandise, and Home Improvement. Woolworths operates in Australia and New Zealand and owns major brands such as BigW, Beer Wine Spirits (BWS), or Dan Murphy’s. The Company was founded in 1924 and listed on the ASX in 1993.
Catalysts: Woolworths has a long-lasting history of delivering shareholder value and sustainable growth. Whilst 2016 earnings are expected to be ~25-30% below the previous corresponding period, increased investment initiatives have the potential to yield long-term economic benefits. Upside stems from the planned exit of the loss-making Masters business. The projected FY16 dividend yields 5-6% at current prices and is expected to be 100% franked. Recent management changes complement the favourable track record of existing board members in capital markets.
Hurdles: Woolworths has recently posted declining earnings and there is no guarantee that increased investments as part of the ‘change program’ will attract new customers. The retail sector is highly competitive which may put downwards pressure on profit margins as competitors offer low prices in order to gain market share.
Investment View: Woolworths offers profitable exposure to a medium-term turnaround of one of Australia’s largest diversified retailers. We are attracted to its long-term growth trajectory, market share, and dividend yield. The competitive environment and recent loss of growth momentum are principal risks. The stock is trading at an undemanding valuation relative to its long-term average due to bearish sentiment and a chain of negative announcements. We favour the balance of risk and upgrade our view from ‘hold’ to ‘buy’.
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