Positive outlook for Coles

Insight on demerger expected as soon as this week

COLES is expected to emerge as a newly listed independent company with store sales growth superior to its archrival Woolworths, although the nation’s second-biggest supermarket chain will face the headwinds of costs associated with the phasing out of plastic bags.

Coles has also gained an advantage over Woolworths thanks to its incredibly popular “Little Shop” collectables campaign, which was mostly paid for by suppliers, but which is expected to mean extra labour costs, as strong demand required more staff to stock shelves.

The assessment of analysts comes as the investment community await documents from Wesfarmers on its $20 billion demerger of Coles, which are tipped to land any day soon.

They will provide an insight into, and detailed financial information about, the Coles business since it was bought by Wesfarmers in 2007.

JP Morgan analyst Shaun Cousins said in a note to clients that Wesfarmers had disclosed little on the details of the subdivisions within Coles, but information was expected in the demerger scheme booklet, which could be published as early as this week.

Wesfarmers managing director Rob Scott (left) had earlier said shareholders could expect an equivalent dividend payout as they would have received if the demerger did not go ahead.

Coles is due to issue its firstquarter sales results on October 15.

JP Morgan is forecasting that EBIT margins for Coles will remain below Woolworths in food, liquor and convenience. Mr Cousins said that based on EBIT, including new corporate costs (as a standalone Coles), and a 10 per cent discount to the Woolworths EBIT multiple, JP Morgan ascribes a value of $18.3 billion$18.6 billion for Coles.

Mr Cousins has revised upwards Coles’ first-quarter likefor-like sales growth, and revised downwards the firstquarter performance for Woolworths, with Coles’ lead expected to extend into the second quarter. JP Morgan is tipping Coles to now report firstquarter same-store sales growth of 4 per cent, up from an original forecast of 2.5 per cent, and for Woolworths to post 1.3 per cent growth, down from an original forecast of 1.8 per cent.

It would mean that Coles would regain crowing rights of having the fastest same-store sales growth after being beaten by Woolworths for the past seven quarters. It would come at a perfect time as investors ponder an investment in Coles when it lists on the ASX later this year.