Woolworths Delivers, Again

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This story features WOOLWORTHS GROUP LIMITED.
For more info SHARE ANALYSIS: WOW
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

The market had been expecting an FY08 profit for Woolworths ((WOW)) of around $1.62 billion and the company delivered a high quality result that was right on the money. The result that prompted Merrill Lynch to note it couldn’t remember the last time the company had disappointed with an earnings or sales result.

Even taking a division by division approach, the broker could find few holes in the result, with the Australian food and liquor, Big W and hotels divisions all meeting its high expectations. While consumer electronics and the group’s New Zealand assets aren’t performing on par with the rest of the business, the broker notes management has recognised this and is working to improve returns.

Post the result the broker has made some minor revisions to its numbers but remains very comfortable with guidance of 9-12% earnings growth in FY09, pointing out even in the current tough environment the company should have little trouble posting a better result. ABN Amro agrees, forecasting earnings growth of 14-18% in the coming year.

One issue for the company, in Merrill Lynch’s view, is management’s ambitious plans with respect to capital expansion, which increases the risk the company may not generate enough in the way of returns from the money invested. Credit Suisse is similarly cautious, as it expects the company to pursue growth via overseas expansion, a move that would increase the medium-term risks.

What it also means is that any capital management initiatives the market may have been hoping for are being put on hold. ABN Amro has no problem with the decision, as on its numbers, a share buyback would not have been earnings accretive and so would have been of little value to shareholders.

Given the lack of surprise in the result, earnings revisions have been relatively modest, with the FNArena database now showing consensus earnings per share forecasts of 148.3c in FY09 and 169.8c in FY10. While the range for this year is relatively narrow, in FY10 Macquarie is forecasting EPS of just 156c, while Merrill Lynch is at 178c.

Post the profit result, the database shows Woolworths is rated as Buy five times, Accumulate once and Hold four times, while the average share price target has increased to $30.67 from $30.24 prior to the result. This compares to a median price target of $29.80 according to Thomson One Analytics. The biggest change comes from Macquarie, which lifted its target to $31.11 from $26.42, while also upgrading the stock to Outperform from Neutral.

While it sees the upside from capital management via a share buyback, the broker also notes the company is continuing to strengthen its financial services capabilities via the Everyday Money credit card. This development of its customer engagement capabilities offers long-term competitive advantages, in its view.

Today, shares in Woolworths are stronger, and as at 2.05pm, the stock was up 45c at $27.15. The trading range over the past 12 months is $22.85 to $35.05.

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