COMPANY NEWS & UPDATES
Coles Group Limited ( COL )
Sell Valuation $ 13.60
Earnings Forecast
Yr to June |
2021A |
2022F |
2023F |
|
Sales Revenue
($ M )
|
38,562 |
39,391 |
40,302 |
|
Reported
Profit ($ M )
|
1,005.0 |
957.9 |
1,049.0 |
EPS ( c ) |
75.3 |
71.8 |
78.6 |
Div ( c ) |
61.0 |
61.0 |
66.8 |
P / E ( x ) |
23.0 |
24.9 |
22.8 |
Yield (%) |
3.5 |
3.4 |
3.7 |
Franking (%) |
100.0 |
100.0 |
100.0 |
|
EPS Growth
(%)
|
7.5 |
-4.7 |
9.5 |
* Profit & EPS adjusted for options , goodwill , notional earnings and nonrecurring items .
Inflation to Fade in FY2023
Food price inflation is well and truly underway in Australia and we continue forecasting supermarket shelf prices to rise by mid single digits in the second half of FY22 . We expect these abnormally high price increases to bolster supermarket earnings in the near term , offsetting rising cost of goods sold , higher energy prices , weak population growth , greater out-of-home food consumption , and temporarily bloated supply chain costs because of COVID-related disruptions and demand volatility . However , we forecast this tailwind to moderate from FY23 , with food price inflation averaging around 2.5 % in the subsequent decade . The Australian government expects inflation to moderate over the medium term too . In its latest federal budget , the government forecasts consumer prices to increase by 4.25 % in FY22 , before inflation eases to 3.00 % in FY23 , and 2.75 % in FY24 .
Our valuation for Coles is unchanged at $ 13.60 , and screens as overvalued . The current share price suggest the market is more optimistic on the profit outlook for Coles . However , we expect structural challenges to limit sales and earnings growth at around 4 % over the next decade . We anticipate competition between the Australia ' s supermarket chains including Aldi to remain intense , and the quickly expanding and expensive online channels of the majors to add more costs .
A prolonged period of inflation above our base case estimate could potentially drive greater sales and earnings growth , and present an upside risk to our valuation . However , we expect stubbornly high inflation to trigger interest rate hikes , in turn weighing on price to earnings ratios and their inversion , earnings yields .
A key downside risk to our near-term forecast Coles is changing grocery shopping habits . While demand for consumer staples is less price elastic than for discretionary items , product mix shift away from higher margin premium products , either branded or private label , could weigh on gross profit margins ; and consumer migration to discounters see market shares of full-service supermarkets decline . Recent observations in the British grocery market , where food prices increased by 5 % in the March quarter of 2022 , suggest consumers have started altering their shopping preferences . According to data analytics and consulting group Kantar , shoppers have been favouring private label products over national brands , and discounters over full-service supermarkets .
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