Citi puts Woolworths back on the shelf

Citigroup’s Craig Wooolford has analysed Woolworths’ fourth-quarter sales growth of 4.3% and does not like what he sees.

“Food and liquor is grinding slightly higher but more expenditure was required in the fourth quarter, such as elevated petrol discounts,” Woolford says. “It'll be difficult to see much stronger growth from the existing business. We have a sell rating given its lofty 2014 financial year estimated PE ratio of 16.8 times. We see 15 times as more appropriate.”

Woolford says food and liquor sales per square meter totalled $15,984 in the 2013 financial year, up just 0.1%. This key measure has been stuck near $16,000 for five years, he says.

“Our concern is that costs per square meter continue to rise and Woolworths will eventually run out of high-quality cost savings to offset sluggish sales per square meter,” the Citi analyst says. “We are puzzled by escalating petrol discounts. Perhaps the rational grocery market is breaking down? We estimate Woolworths spent an additional $28 million in its fourth quarter 2013 on the discounts.” 

Woolford has a 12-month price target of $31.50 for Woolwoths shares. That’s a 6.1% discount to the stock’s current price. At 1245 AEST Woolworths shares were up 33 cents, or 1%, to $33.55.

“We believe the current multiple is too high for a company with mid-single digit earnings growth potential,” says Woolford. “The company trades at a 50% premium to global peers based on enterprise EV/EBITDA financial year 2014 estimate, which we think overstates the attractive industry structure.”

For newsletters' consensus for Woolworths, see Cliona O'Dowds Collected Wisdom.