Coles and Woolworths slump, as RBC initiates coverage
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The news: Shares in Coles and Woolworths dropped as they traded ex-dividend, as RBC Capital Markets initiated coverage on the supermarket giants.
The numbers: Coles was 3.8% lower at $19.01 and Woolworths was down 3.3% to $28.90 1:45pm AEDT. Consumer staples was the worst performing sector, down 3.2%, while the broader ASX 200 was 1.2% lower.
RBC initiated coverage on Coles with an 'outperform' recommendation and a price target of $22 per share.
It opened coverage of Woolworths with a 'sector perform' recommendation and a $31-per-share price target.
The context: RBC analyst Michael Toner said Coles' focus on core supermarkets while tightly managing costs and capital expenditure is a "winning strategy in this market", where consumers gravitate towards value.
This should see Coles well-placed to take market share and drive cost cuts, Toner said, as RBC forecasts higher like-for-like growth, earnings-per-share growth, free cash flow yield, and lower capital intensity over the medium term.
Toner noted that Woolworths remains Australia's "dominant grocery retailer", but its outlook is being weighed down by headwinds from soft volumes, price investment, growing online penetration, inflation, and regulator and government scrutiny.
He said the elevated capital expenditure has "not yet delivered appreciable returns", while non-core businesses are dragging on earnings.
The source: RBC Capital Markets research
