-New customers generated from the pandemic restrictions
-Slowdown in comparable food sales growth likely in second half
-Hardware acquisitions consolidating
Momentum is improving for
Credit Suisse suspects the result has probably missed more optimistic expectations but there was enough in the food division to support a solid outlook for FY21. The broker underestimated the additional costs required to meet the spike in demand, and profit leverage was therefore significantly lower than usual.
CLSA notes, while operating cash flow appeared very weak it was temporarily affected by significant investment in inventory in order to service the sales growth currently being achieved.
To date first half sales have accelerated, with grocery up 17%, liquor up 5.5% and hardware up 9.4%. The pandemic has provided new customers which, coupled with price investment, should improve medium term sales. More broadly,
Credit Suisse believes the structural headwinds for IGA retailers will continue but also notes the potential for some permanence in localised shopping, which is of a strategic benefit to the independent grocery sector. Localisation, along with online expansion (of benefit to the large supermarket chains), are the two features of the current restrictions which are, presumably, going to continue to some extent.
However, Citi is more sceptical, believing the competitiveness and habitual nature of grocery shopping will mean shoppers return to their typical patterns over time and sales for
Morgan Stanley believes the stock warrants a higher multiple compared with history, given its diversification and balance sheet strength. The broker lifts FY21 estimates by 6% to reflect a modest increase in anticipated food earnings.
FY21
Under normal circumstances, Credit Suisse would assume a 6% earnings margin on incremental sales and estimates
Citi estimates sales growth was 25% in April before moderating to 17% over the past seven weeks. Some of the tailwinds are likely to dissipate over the rest of the first half of FY21 and the broker forecasts 5% underlying growth, in line with the market.
While expecting underlying food sales and earnings growth of 8% in the first half, Citi asserts this is more than offset by contract losses and will drive a headline -7% fall in first half food earnings. A further slowdown in growth in the second half, amid the challenge of cycling strong sales, should result in just 2% underlying growth on the broker's calculations.
Hardware
Hardware is showing some resilience in the face of slower trade demand, yet Credit Suisse expects trade will turn negative in the second half of FY21 as government housing stimulus moderates. Goldman Sachs observes
The company completed two acquisitions, one in
The latest acquisition of 70% of Total Tools for
Following both the equity raising and build in working capital,
Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and
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