Coles priced to perfection following spin-off

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Glenn Freeman: Thanks for joining us, Johannes. Now, we are talking today about Coles and the spin-off of Coles from Wesfarmers as an IPO earlier this week. What does that mean for the retail grocery segment, for Coles and for its investors?

Johannes Faul: Yeah. So, the segment itself – the grocery industry hasn't changed with that spinout of Coles. But what we can see now and observe as investors is really what values is ascribed to the supermarkets business that currently lived inside of Wesfarmers and the remaining Wesfarmers business which really dominated by Bunnings. And in our view, Coles is now trading around fair value and Wesfarmers remain slightly overvalued with investors or the market being a bit too optimistic on Bunnings' prospects, especially near-term with those headwinds coming from a weaker housing market. And if we look at Coles versus Woolworths in terms of their valuation of the stock, so I just mentioned Coles is fairly valued in our view, but Woolworths remains overvalued. And now, with that direct comp that we have in Coles, it's much more apparent, I think, to the market and investors. So, we would expect that might be a catalyst for the stock, for Woolworths stock actually to soften over the next few months.

Freeman: And in terms of – there's quite a few competitive pressures in play for Coles at the moment or looking ahead, we've got the potential for more competition to enter the space. You've got AmazonFresh is potentially ramping up and Kaufland and some of the other German. So, do you think there's going to be some downward momentum in Coles' share price going forward, or what's going to happen?

Faul: Touching on the competitive environment and where we see the outlook really is, you just mentioned Kaufland, Kaufland will be opening stores, in our view, by the end of 2020, they will be up and running, but only with a handful of shops. And if this format, this hypermarket format, resonates with Australians, it will still take many, many years for them to get critical mass and build scale. And you also mentioned AmazonFresh, which we think, looking at overseas markets, it takes a very long time for that to roll out, to establish itself and it's a very, very slow progress. So, for new entrants, we think the competitive pressures will not be felt for a while. But Aldi is obviously here, has established itself and I think that that discount channel that we now have in Australia will keep prices sharp also across Coles and Woolworths which means any increase in the profitability, a material increase is very unlikely in our view.

This report appeared on 2022 Morningstar Australasia Pty Limited

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