Coles – Defensive Income

Coles Group remains under Algo Engine buy conditions and is a current holding in our ASX 100 model portfolio. 

The share price has rallied 6% over the past week and we now recommend selling covered call options to enhance the income return.

COL goes ex-div $0.24 on the 28th of August.

Coles – Algo Buy Signal

Coles Group is under Algo Engine buy conditions and is now a holding in our ASX 100 model portfolio.

FY19 profit fell 9% to $1.43b, which was down from $1.58 the previous year.

The company declared a final dividend of $0.24 and a special dividend of $0.115.

We see support for the share price at $13, underpinned by the extensive cost-cutting program announced in the last quarter. Target cost savings over the next 3 – 5 years exceed $1 billion dollars.


Coles Group – Valuation Review

Coles Group has been a stand alone listed business since November 2018, after being spun-out of Wesfarmers.

The financial performance to date has been patchy at best and the recent Coles Strategy Day highlights were the confirmation of the dividend payout of 80-90% for FY19, (which translates to an estimated $0.55 per share or 4.1% yield) and the $1bn cost out program.

We forecast flat earnings and revenue growth into FY20 and suggest investors sell a covered call option to enhance the income return.





Coles – Valuation Review

Coles Group is under Algo Engine sell conditions following the lower high at $12.70.

The group announced their 3Q19 sales growth which came in ahead of market expectations. Food and liquor sales grew at 3.3% in 3Q19, however, management indicated that they expect to see the growth moderate back to 2%, or in line with historical growth rates.

A review of the valuation forecasts show FY20 revenue of $40bn, EBIT $1.34bn, on EPS of $0.68 and DPS of $0.55, placing COL on a forward yield of 4.8%.

We see limited downside risk for the share price and we consider selling at-the -money-call options as an alternative to selling the underlying stock.




Coles – Take Profit

Earlier this month we recommended buying Coles Group at $11.25. With the stock now trading $12.00 + we consider this an opportunity to lock-in profit.

Coles offers limited earnings growth and the rally in the stock price has been supported by lower global interest rates, rather than company specific news.

Alternatively, investors who wish to hold the stock, may consider selling at the money call options to enhance the income return.



Coles – 10% Cash Flow

Following the earnings miss in the February result, we feel Coles share price now reflects fair value. At 15x earnings and 5% yield there’s an opportunity to buy the stock and sell covered call options, to deliver 10% annualized cash flow.

We question the earnings outlook next year, mainly due to increased capital spending requirements. However, for the balance of 2019 we expect the share price to remain within the $11 to $11.75 price range.

For more detail on the derivative strategy, please call our office on 1300 614 002.


Coles – Where is Fair Value?

Coles has under invested in the supply chain and online platform vs Woolworths and therefore, investors need to be prepared for lower returns as Coles steps up capital expenditure over the coming years.

If we assume 3 – 5% EPS growth, (half that of WOW), Coles will offer a 5.4% dividend yield into FY20, based on earnings per share of $0.80

Coles trades on 18x FY19 earnings and with little upside to the share price, we recommend investors add a covered call to enhance the income return.