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Coles Group – Estimate of ‘Intrinsic Value’ (P)
Abnormal Earnings (Comprehensive Residual Income - ReCI) Valuation Model:
V0 = 3,356 +
767(1.0756) + 840(1.0756)2 + 922(1.0756)3 + � 922(1.02)(0.0756−0.02) × 1(1.0756)3� = 19,134 million P0 = $14.34
Discounted Dividend Valuation Model
V0 =
1,241(1.0756) + 1,030(1.0756)2 + 1,099(1.0756)3 + � 1,099(1.02)(0.0756−0.02) × 1(1.0756)3� = 19,134 million P0 = $14.34
Projections:
2023 A 2024 E 2025 E 2026 E
Sales Revenue 40,483 40,888 41,501 42,331
Gross Profit 10,557 10,590 10,770 11,006
Admin Expenses (8,848) (8,914) (9,006) (9,144)
Tax expense @ 30% (503) (529) (559)
Core OI from Sales 1,173 1,235 1,304
Core other OI 400 @ 1 – 0.3 200 200 200
Unusual OI 0 0 0
Total OI 1,374 1,733 1,435 1,504
Core NFE NFO @ assumed % (353) (358) (341)
Comprehensive Income (CI) 1,108 1,021 1,077 1,163
Residual CI = CI – ke * SEt-1 767 840 922
NOA @ ATO = 3.25 11,928 12,542 12,730 12,985
NFO 8,572 9,407 9,548 9,739
S/E 3,356 3,136 3,183 3,246
DIV = SEt-1 + CI - SEt 1,241 1,030 1,099
Support and Underlying Assumptions:
discount rate: β = 0.76 RF = 3% [E(RM) – RF] = 6% → ke = 7.56%
forecast horizon: 3 years
support: stable, mature business, unlikely to significantly alter its business model or radically
innovate (reinvent itself), although on-line will increase as will the use of technology
sales growth forecasts: 2022 A 2023 A 2024 E 2025 E 2026 E
-0.008% 5.874% 1.0% 1.50% 2.00%
support for assumed growth rates: strong price competition for at least the next 3 years; industry
forecasted to grow at a slower rate than economy, especially over the next year (IBISWorld);
population growth limited; disposable income growth limited
sales growth will follow industry patterns, increasing from 1.0% in 2024 to 2.00% by 2026
growth in assets (NOA): asset turnover (ATO) somewhat stable around 3.26
support: 2021 ATO = 3.1825 2022: ATO = 3.0585 2023: ATO = 40,483/11,928 = 3.3939
no reason to believe that working capital policies will change materially (cash, A/R,
inventory, A/P, pp&e, right-of-use assets, intangibles, equity investments)
based on projected individual asset turnovers → ATO will stabilise at 3.26
gross profit margin: driven by price & cost increasing from 0.258 to 0.260
costs expected to rise given inflationary pressures, but slightly slower than sales revenue
→ gross margin will improve slightly over the next 3 years as follows and then stabilise at 0.260
2022 A 2023 A 2024 E 2025 E 2026 E
0.2574 0.2581 0.2590 0.2595 0.2600
core operating expenses (administrative expenses): slight decrease to 0.216
2021 A 2022 A 2023 A 2024 E 2025 E 2026 E
0.218 0.214 0.219 0.218 0.217 0.216
IBISWorld projects a slight decline in costs for industry
tax expense: assume legislated 30% tax rate on ‘core OI’ (historically around 29 – 30%)
other operating revenue & income: no note to explain; assume constant at approximately 200 after-tax
unusual OI: by definition, non-recurring assume = 0 (on average)
financial level (NFE): financial leverage (FLEV) ≈ 3.0 borrowing costs (after tax) = 3.75%
2021 A 2022 A 2023 A 2024 E 2025 E 2026 E
3.31 3.002 2.554 3.000 3.000 3.000
support: assume around optimal capital structure since will need some debt, and hence capital
structure will stabilise at 3.00; current borrowing costs of 3.1%, assume increase to 3.75% and then
drop to 3.5% in 2026 and beyond
assume OCI = 0
assume NCC = 0 → SEt = SEt-1 + CI – Div also, # common shares outstanding = 1,334 million
assumed growth rate: g = 2.0% slightly lower than GDP growth
sensitivity analysis:
g = 1.75% or 2.25% P0 = $13.88 or P0 = $14.85
sales growth constant at 2.50% P0 = $14.63
ATO = 3.5 or 3.00 P0 = $14.85 or P0 = $13.70
FLEV = 2.5 or 3.5 P0 = $14.13 or P0 = $14.51
gross profit margin = 0.2575 P0 = $13.41 ***
core operating expenses = 0.218 P0 = $13.63 ***
key estimates appear to be ‘gross profit margin’ and the ‘core operating expense ratio’; the
margins are so small in the industry sector that slight changes in core costs relative to sales
are highly consequential.