We see the demerger of Woolworths and Endeavour group as an opportunity for both businesses to grow rapidly over the next five years. Should I Buy Woolworths Shares? We are currently Bullish on WOW, and here are our reasons why.
WOW Shares Price
The Woolworths share price recovered rapidly from the COVID crash. Their share price dropped 23% during the start of 2020. In comparison, the broader marker dropped 33.7% during this period. The current share price is 37.85. WOW has returned 82.5% over the last five years. Their share price has a 52-week range of 35.96-44.06.
We notice in the month of June the WOW shares price dropped massively from 43.70 to 36.70 (down 16%). This is the result of the Endeavour Demerger. Due to the Demerger, Endeavour is no longer a direct member of the Woolworths groups, thus due to the loss of earnings and assets, the share price was reduced by the market accordingly. Shareholders received equal shares in Endeavour, so there was no net loss by investors.
Should I Buy Woolworths Shares: About
Woolworths is a core Australian brand established in 1924 in Sydney, Australia. The group’s primary focus is the retail grocer market through their Australian and New Zealand food subsidies: Woolworths and Countdown. They also have exposure to the insurance business.
Woolworth group’s other businesses include Hotels, Big W, and the recently demerged Endeavour Drinks.
Endeavour Group is Australia’s leading retail drinks and hospitality business. In its Retail segment, it has the largest store network in Australia through the Dan Murphy’s and BWS brands with 1,630 stores as well as leading digital assets, strong loyalty programs, and complementary specialty businesses. In its Hotels segment, it operates 332 venues providing a range of hospitality experiences including food, drinks, gaming, and accommodation.
Should I Buy Woolworths Shares: Dividend History
WOW shares typically announce a dividend with the release of its half-yearly results in February and full-year results in August as seen in their financial calendar. Dividends are typically paid twice a year, in March (interim dividend) and September (final dividend).
WOW shares have paid biannual dividends every year since 1993. This includes the 2008 GFC and COVID recession. WOW shares pay dividends that are fully franked. The current average yearly dividend for WOW shares is $1.01 giving them a decent net yield of 2.67% or a gross yield of 3.81% at the current share price.
Due to the Demerger, the group’s earnings will be slightly reduced, as such we will see the dividend amount reduce. The corresponding share price reduction should keep the yield similar. Endeavour plans on maintaining the group’s dividend policy.
Should I Buy Woolworths Shares: Investor Sentiment
After surveying 168 Investors about their current WOW shares sentiment: BUY-HOLD-SELL, as well as their target price over the next 12-months here are the results;
The results from this survey show there is currently a strong BUY investor sentiment on WOW shares. So how much are WOW shares worth? Let’s get into it.
|Volume 4W Avg||3,060,237|
|NTA per Share||7.40|
From the fundamentals, we can see WOW is slightly overpriced in terms of PE and Book Value. We can see the company does have a massive ROE of 20.9%, well above the market average of 11%.
In February Woolworths released their half-year reports with the following highlights:
Australian Food: Despite the challenging operating environment, total H1 sales grew 10.6%. EBIT grew by 13% despite incremental COVID costs of $168 million in the half.
New Zealand Food’s total sales increased by 4.3% in the half but growth in Q2 was muted (+1.8%), with lower market growth impacted by fewer international tourists. eCommerce sales continued to grow strongly at 47.7% for H1, with a penetration of 11.6%. EBIT increased by 4.4% from the prior year.
Endeavour Drinks sales continued to benefit from increased at-home consumption and trading up with Dan Murphy’s and BWS both maintaining strong sales growth during the half and achieving record Christmas Eve sales. Total sales
increased by 19.0% and EBIT grew 24.1%.
Hotels Sales and profit trends improved in half relative to H2 F20, as Victorian venues reopened in early November 2020 and operating restrictions eased. Total sales declined by 27.5% and EBIT was 45.4% below the prior year at $122 million, a material improvement on the loss of $52 million in H2 F20.
Group Trading Performance
Despite a challenging period, we see excellent revenue and EBIT growth across all sectors except the hotel segment. Overall revenue was up 10.6% to $35.8 Billion. EBIT was $2 Billion, which is again up 10.5% from the previous year.
Overall the group’s Net Profit After Tax was $1.175B, which is up 14.8%.
Woolworths has continued to strengthen its balance sheet. Overall net assets are $9.682B.
In summary, the short-term downside is likely to prevail as long as $40.7 is resistant. The alternative scenario is that an upside breakout of $40.7 would call for $44 and $46.
Here’s A Breakdown Of The Detailed Technical Factors;
Insider Ownership and Trading
WOW group is largely owned by the general public, accounting for 78.5%. Institutions own 21.5% and Individual Insiders ownership is very low at 0.06%. This is relatively standard for large historic corporations.
The substantial holders are Vanguard and Blackrock
|Name||Total Shares||Shares Held (%)|
There has been no significant insider trading in 2021.
Woolworths Vs Coles The Supermarket Sector
It’s no question Woolworths and Coles are the big names in Australian Supermarkets. There has been some market stealing from Aldi and a few smaller names like IGA, but it’s no question COL and WOW have a duopoly.
Coles Demerged from its parent company Wesfarmers Ltd back in November 2018. Since then the share price has increased 37.44%. Today it has a market capitalization of $22.6B. In comparison, WOW is now valued at $48B
Both Coles and Woolworths are staple Australian businesses that have withstood the test of time and proven to be good recession-proof defensive stock picks.
Statistica Reports: “Woolworths and Coles, both attract around a thirty percent share of a market that is worth around $90 billion per financial year. Industry turnover has seen steady year on year growth and is currently worth around $110 billion”
“Aldi recognized a market share of around 11 percent during the 2019 financial year, the third-largest share in the country.” Source: Statistica
WOW VS COL Financials:
When we compare the Food businesses of both companies it is obvious that WOW comes out ahead.
WOW VS COL Fundamentals:
WOW’s underlying sales have shown stronger results than coles, as a result, their fundamentals are slightly more expensive which is to be expected.
|Sales/Square metre ($)||$17236||$1680|
The Endeavour Demerger
First teased back in July of 2019, the demerger of Endeavour from the Woolworth Group has now been finalized. Endeavour ASX: EDV began trading midday on Thursday the 24th June 2021. The share began trading at $6.50 and are now priced at $6.20, four days later.
What is a demerger?
Investopedia defines it as:
A de-merger is a corporate restructuring in which a business is broken into components, either to operate on their own or to be sold or to be liquidated as a divestiture.
What is the Endeavour Group?
The Endeavour group is a combination of the Endeavour Drinks and ALH Group Subsidies. Combined they own Australia’s leading alcohol retail chains BWS, Dan Murphy’s, and Cellarmasters, As well as a portfolio of hotels, venues, accommodation, and gaming assets.
Endeavour Group will own 1,630 stores, 332 hotels, 1,775 liquor licenses venues with 12,364 pokie machines, and 290 TABs and KENO outlets
- Endeavour Drinks – BWS, Dan Murphy’s, Cellarmasters stores, Pinnacle Drinks, EndeavourX
- ALH Group – hospitality venues, hotels, accommodation and gaming assets
In our opinion this demerger simply makes sense. These brands have no real synergistic advantage being under the same umbrella. Woolworth’s core businesses are the Giant retail business all Australian/ New Zealanders know Woolworths, Big W, Everyday Rewards Program, WooliesX, Quantium, Countdown, and Cartology. Which is obviously unrelated to the Drinks and Gambling portfolio of Endeavour Group.
This Demerger will allow the Groups to better focus on the growth of the businesses separately. Post demerger WOW will still have a (14.6%) shareholding stake in EDV, but won’t be responsible for its business decisions.
Demerging will also allow WOW more opportunities as a benchmark ethical company, which can be very attractive for individual investors and ESG funds. Before this move, the ‘unethical’ gambling and drinking business disqualified WOW from many of these funds.
WOW group believes demerging Endeavour Group from the broader Woolworths portfolio will increase shareholder value over the long term, which we agree with.
The WOW EDV Partnership
Due to the combination of WOW and EDV logistics shared costs, the pair have entered into a long-term partnership agreement regarding Supply Chain & Stores, Loyalty & Fintech, Digital & Media, Business Support, and International. This is to prevent the complete logistical restructure of EDV.
Each year, Endeavour will pay Woolworths $564 million for access to these logistical business areas.
Endeavour Group Saw massive revenues of $10.6 billion in FY20 and EBIT of $693 million. The group recorded $1.4 billion in operating cash flow before finance costs and tax.
EDV retains $3.2 billion in net assets including $556 million cash on hand.
Endeavour Group announced they intend to follow Woolworths Group’s established dividend policy, with a payout ratio target of 70% to 75% of profit after tax, which we expect to be fully franked.
What does this mean for Shareholders:
Pre-demerger all WOW shareholders received 1 share in EDV for every 1 share they owner in WOW.
- So if you owned 1000 WOW, you received 1000 EDV post demerger.
As we mentioned earlier, following the demerger the WOW share prices fell. This is due to the fact the group no longer owns Endeavour, as such the market has priced in the new intrinsic value of the company.
Following the demerger, I am bullish on the long-term prospects of both companies.
Despite the fact that Supermarket retail and alcohol are largely recession-proof industries, there has been some COVID impact on the group. The group expects all group businesses to decline in the March-June period due to ‘the cycle of COVID Sales Surge’. Their Hotels’ H2 F21 EBIT is expected to be well above H2 F20, assuming venues can continue to trade without further restrictions.
The current environment has also given them an opportunity to optimize eCommerce at scale to drive further efficiency.
In the broader picture, we can see the group demerger being advantageous for shareholders of both companies. We are expecting excellent growth from both businesses over a five-year period.
Should I Buy Woolworths Shares: Prophet’s Take
Woolworths is and will continue to be a benchmark Australian Company. We see the demerger of Endeavour group as an opportunity for both businesses to grow rapidly over the next five years. This also allows WOW to be widely excepted by ethical investors and funds. We are BULLISH on Woolworth shares.
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