EU CONSUMER STAPLES: Woolworths: FV

(WOWAU; Baa2/BBB; Stable) 

• exp. €500m 7.5y FV +137, pricing tomorrow
  • we see no CoC (but no significant equity holders either)

Woolworths is Australia's largest grocer holding a 38% market share. Closest competitor, Coles, has a 29% share and together they run a effective duopoly - unlike most of our local issuers who operate in highly fragmented markets. It has translated to profitability - Woolworths runs sector leading margins (at near double French names). When paired with a typical mid-2 levered balance sheet it leaves it on Baa2/BBB ratings with ample headroom (1x below ceilings at both).

Still, Woolworth's is not our lowest beta pick in grocers (Tesco is) and that is on near term catalyst shifting more negative. This was triggered by consumer dissatisfaction on rising grocery prices. Inflation has since receded (running at ~3%) but the political and regulation pressure that emerged from it remains. Regulation was effectively resolved two weeks ago without harm and was a major credit positive (evidenced by both Coles and Woolworths mandating their bond issuance soon after). The political uncertainty remains given a election is one month away and is too close to call. Centre left (currently in power) is more soft on the grocers, centre right has said forcing the two operators into divestitures could be considered as last resort.

On Sunday New Zealand's Finance minister (who is not facing an election) said she would "actively seek a third player" and that advisors were also studying "a possible demerger of existing entities". In New Zealand the duopoly is held by Woolworths & Foodstuffs. The smaller country (pop. 25m vs. 5m) contributes 12% of WOW revenues but on inferior margins (EBIT 1.3% vs. Aussie food on 6%) contributes only 3% of group EBIT. We flag as the changes there may impact the consumer sentiment and political pressure in Australia.

Other real changes from above have been;

• CEO resigning a few days after a walking out on a media interview (last year). He was well respected by markets.
• Co guiding to MSD EBIT fall (ex. one-offs) this FY (12m to June) as it attempts to aggressively price and win back customer satisfaction

Other credit negatives we have with the co;

• Its (seeming) refusal to put a leverage target in place which has held back rating upgrades
  • We note this particularly with a new CEO and a ongoing portfolio review (latter unlikely to be a mover given core Aussie Food operations makes up 96% of EBIT)

Credit positives;

• 1x headroom to rating thresholds (can take a -30% fall in EBTIDA on unch debt levels)
• Sector leading profitability as the starting point to all the above
• Positive history on BS governance and stated commitment to "solid IG ratings"

On FV we have always had the view taking the illiquidity discount among the single country grocers screens more value then investing in tighter global operators ADNA & Carrefour. We spread Woolworths similar to REWE & El Corte Ingles. We see room for it tighten from there if some of the above uncertainty is resolved post-election. On that vein have a existing value view on the shorter WOWAU-28s.

Quick figures for reference (FY24/to June'24):

• AUD 68b (€39.5b) in sales, 12% of which in ecommerce
• AUD 6.0b (€3.5b) in EBITDA on a 8.8% margin
• AUD 3.2b (€1.9b) in adj. EBIT on a 4.7% margin
• AUD 16.8/15.5 g/n debt levered 2.8x/2.6x

WOW is a well covered equity name (similar to Tesco/Carrefour). FY25 consensus is currently at;

• Revenue +2%, EBITDA -4%, EBIT -12% on 4.2% margin (-50bps yoy)
  • Note 1H EBIT was -14% but says ex. one-offs including industrial action, it would have been -7%. Guidance for 2H EBIT is MSD decline.
• On a conservative -10% EBITDA fall we see leverage rising to 3.1x/2.9x still well below thresholds (Moody's gross 4x, S&P net 3.75x)