Wednesday 30 January 2008 Change of target price Woolworths (WOW) Buy Important: The above recommendation has been made on a 12 month view and may not suit Great expectations your investment needs or timeframe. The basis it is prepared 2Q08 sales growth of 8.3% was below our expectation of 10.1%. on is summarised on the last page of this report. PLEASE CONTACT Nonetheless, management's announcement of a c.80% increase in YOUR ADVISER TO DISCUSS store refurbishments for FY08 (approx. 220 stores) represents a THIS GENERAL RECOMMENDATION BEFORE substantial investment in FY09 and FY10 like-for-like growth. ACTING ON IT.
Moderate Volatility Key forecasts
FY06A FY07A FY08F FY09F FY10F Absolute performance EBITDA (A$m) 2244 2701 3160 3585 3979 Reported net profit (A$m) 1015 1294 1581 1836 2099 n/a Normalised net profit (A$m)¹ 1015 1294 1581 1836 2099 Short term (0-60 days)
Normalised EPS (c)¹ 90.9 108.8 130.2 150.8 172.0 Normalised EPS growth (%) 9.04 19.7 19.6 15.9 14.0 Dividend per share (c) 59.0 74.0 87.5 101.5 116.0 Dividend yield (%) 2.00 2.51 2.97 3.44 3.93 Food & Staples Retailing Normalised PE (x) 32.5 27.1 22.7 19.6 17.2 Australia EV/EBITDA (x) 17.6 14.0 12.1 10.6 9.26 Price/net oper. CF (x) 19.3 15.3 14.1 12.5 11.1 ROIC (%) 26.1 18.4 22.1 22.3 23.9 Price 1. Pre-goodwill amortisation and exceptional items year to Jun, fully diluted A$29.50 Accounting Standard: IFRS Source: Company data, ABN AMRO forecasts Target price
A$34.80 (from A$37.50) Strong underlying sales increase should drive profit growth Market capitalisation WOW's 2Q08 sales increased 8.3% to A$12.3bn, a solid result but below our A$35.67bn (US$31.73bn) expectations of 10.1% growth. A softer December trading period and a slowdown in Avg (12mth) daily turnover Food & Liquor trading momentum were the main reasons for the difference. Food & A$91.03m (US$76.71m) Liquor like-for-like growth remains at 6.0%, which, in historical terms, remains a very Reuters impressive run rate. Management confirmed continued market share gains from the WOW.AX WOW80130 major competitor in 2Q08.
Price performance (1M) (3M) (12M) Significant upgrade to store refurbishment programme Price (A$) 33.9 33.3 23.6 In a display of confidence for the new 2010C supermarket format, Woolworths Absolute % -13.0 -11.3 24.8 announced a substantial upgrade to its store refurbishment plans. Having undertaken Rel market % -3.5 5.4 25.7 65 supermarket refurbishments in FY07, WOW now plans to complete 220 new- Rel sector % -6.8 -3.4 12.3 format stores by the end of FY08. This includes 41 new stores. In 4Q08, WOW will now undertake 85 store refurbishments versus 65 for the entire FY07 year. We expect this to increase capex requirements by A$100m and overall capex to increase Jan 05 Feb 06 Feb 07 36 to A$1.7bn-1.8bn. 32 Earnings forecasts moderated slightly 28 Following lower-than-expected sales from the Food and Liquor business in 1H08 and 24 a significant increase in planned capital expenditure in FY08/FY09, we have lowered 20 our NPAT forecasts. We have lowered our FY08 NPAT by 2.1% to A$1,581 and our 16 FY09 NPAT by 2.1% to A$1,836. 12 WOW.AX S&P/ASX200 Valuation and recommendation Stock borrowing: Easy onshore, Easy Following a modest downgrade to earnings, we have lowered our 12-month price offshore target from A$37.50 to $34.80, based on a blended DCF and sum-of-the-parts Volatility (30-day): 33.89% methodology. We note that our forecasts do not include any benefit from the Volatility (6-month trend): ↑ potential for future acquisitions or capital management. The potential for an improved 52-week range: 35.05-23.03 S&P/ASX200: 5716.50 effort by the competition poses the major risk to our earnings and valuation. BBG AP Food & Drugs: 206.24 Source: ABN AMRO, Bloomberg
Important disclosures regarding companies that are the subject of this report and an explanation of recommendations and www.abnamromorgans.com.au volatility can be found at the end of this document. Priced at close of business 30 January 2008.
ABN AMRO Morgans Limited (A.B.N. 49 010 669 726) AFSL235410 A Participant of ASX Group Sourced from ABN AMRO Equities Australia Limited, ABN 84 002 768 701, AFS Licence 240530 INVESTMENT VIEW
Great expectations WOW's 2Q08 sales increased 8.3% to A$12.3bn, slightly lower than our expectations for 10.1% growth. Sales from core retail operations (excluding petrol) increased by 7.6%. Stripping out inflation, supermarket volumes increased 3.6% in 2Q08, with market share in Australian Food & Liquor continuing to grow over the quarter.
Key takeaways
■ 2Q08 growth moderates: One of the key issues from WOW's 2Q08 sales result was the decline in the rate of sales growth in the Australian Food & Liquor business from the prior quarter. Headline sales increased 8.7% in 1Q08, but a more modest 7.4% in 2Q08. Woolworths indicated the drop in sales was due to two main reasons. Firstly, a weaker-than-expected December sales period given wet and cold weather in the northern states of NSW and Queensland, where WOW has particularly high market share. Secondly, given the timing of 2Q08 close-off, the New Year's Eve trading period falls into 3Q08, detracting about 50 points from the headline growth rate. We take the comments from management at face value. A tightening of the sales growth rate for the year from 7-10% to 8-10% is clearly a message from management that sales growth should be maintained through 2H08 rather than fall away.
■ Significant refurbishment programme upgrade: The second issue to emerge from the result is the increase in planned refurbishment activity in 2H08. WOW completed 65 Supermarket refurbishments in FY07. Under its current plans, refurbishment activity has increased from c.120 stores to 220 new format stores this year. This is a clear opportunity for WOW to take advantage of Coles, which is focused on improving its cost of doing business rather than driving top-line sales volumes through store investment. WOW management maintains profit guidance of 19-23% growth in FY08. The increase in refurbishment activity and associated costs is implies clearly to us that WOW's results are tracking ahead of its expectations and it is able to reinvest in increased store refurbishment activity.
Table 1 : Australian Supermarket sales outlook
FY06A FY07A FY08F FY09F FY10F
Number of store refurbishments 60 65 200 200 100 Store refurbishment sales benefit 406 347 679 1,163 942 Underlying sales 24,036 26,756 28,938 31,672 35,071 Like-for-like sales 24,442 27,103 29,617 32,835 36,013 Growth 3.7% 6.5% 6.7% 8.1% 7.1%
Number of new stores 46 10 20 20 20 New store sales benefit 1,016 642 750 790 840
Total sales 25,458 27,745 30,366 33,625 36,853 Growth 8.0% 9.0% 9.4% 10.7% 9.6% Source: Company data, ABN AMRO forecasts
We expect the cost of the additional refurbishments to increase store refurbishment capital expenditure from A$460m to cA$550m in FY08. We expect total capital expenditure in FY08 to increase from A$1.3bn originally to almost A$1.8bn in FY08. The store refurbishment plans are clearly part of WOW's plans to take advantage of the position at Coles, which is increasingly focused on its back of store, rather than its front of store.
WOOLWORTHS 30 JANUARY 2008 2
INVESTMENT VIEW
■ Sector-leading growth maintained: Adjusting for inflation, WOW’s 2Q08 volumes increased 3.6%. Growth was at a slight reduction from 1Q08 levels but remains very strong by industry standards. Management commented that December sales data confirmed continued gains in market share across 2Q08. In our view, sales volumes at such levels are adding substantially to sales leverage and to margin improvement.
Table 2 : Volume growth moderates but remains strong
Growth analysis 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Sales (A$m) 7,052 7,288 6,981 6,424 7,667 7,828 Volume growth 0.90% 2.40% 3.60% 6.00% 5.90% 3.60% Inflation 4.00% 4.00% 3.00% 2.20% 1.70% 2.40% Like-for-like growth (%) 4.90% 6.40% 6.60% 8.20% 7.60% 6.00% Net new stores/acquisitions 4.10% 2.50% 1.70% 1.50% 1.10% 1.40% Reported growth (%) 9.00% 8.90% 8.30% 9.70% 8.70% 7.40%
Source: Company data, ABN AMRO
■ Impact on FY08 guidance: Woolworths profit guidance of 19-23% remains intact. We suspect that, given the increased capital costs and expenses of such plans, it has significantly increased its food and liquor margins in 1H08 and is confident enough of the 2H08 result to be able to absorb the additional costs. Earnings changes
Table 3 : ABN AMRO forecast earnings changes
FY08F FY09F FY10F Previous Revised % change Previous Revised % change Previous Revised % change
EBIT (A$m) 2498.3 2457.1 -1.6% 2834.5 2806.0 -1.0% 3184.4 3146.5 -1.2% NPAT (A$m) 1614.7 1580.9 -2.1% 1875.0 1836.3 -2.1% 2143.4 2099.4 -2.1% Normalised EPS 133.6 130.2 -2.5% 155.0 150.8 -2.7% 176.7 172.0 -2.7% Reported EPS 133.6 130.2 -2.5% 155.0 150.8 -2.7% 176.7 172.0 -2.7% DPS 90.0 87.5 -2.8% 104.0 101.5 -2.4% 119.0 116.0 -2.5% Net op cash flow (A$m) 2568.6 2545.0 -0.9% 2877.1 2871.7 -0.2% 3250.6 3256.1 0.2% Source: ABN AMRO
Valuation and recommendation Woolworths has an imposing track record of earnings growth in recent years; we believe it can achieve its third straight year of 20%+ profit growth. WOW's success is attributable to its strategic focus on achieving a balance between growth and returns. WOW has invested heavily in recent years, which has lifted its rate of earnings growth to above 20%. While returns are slightly lower than prior years, the value created by the company continues to improve.
Historical earnings multiples appear to add little to a positive valuation case for Woolworths, however historical multiples reflect significantly lower rates of growth than current forecasts. WOW is also uniquely placed, given its strong balance sheet, to pursue further acquisitions and capital management.
Reflecting a modest reduction in our earnings assumptions, we have decreased our 12-month price target from A$37.50 to $34.80. Our current price target is based on a balanced blended valuation of our DCF and sum of the parts methodology. The potential for an improved effort by the competition poses the major risk to our earnings and valuation.
WOOLWORTHS 30 JANUARY 2008 3
INVESTMENT VIEW
2Q08 sales result
Table 4 : Woolworths – 2Q08 sales result
Sales growth 2Q07 (A$m) 2Q08 (A$m) Growth (%) Food and Liquor 7,288 7,828 7.4% Food and Liquor (New Zealand) 1,056 1,088 3.0% Petrol 1,179 1,350 14.5% Supermarket Division 9,523 10,266 7.8% Big W 1,131 1,251 10.6% Consumer Electronics 389 450 15.7% General Merchandise 1,520 1,701 11.9% ALH 268 289 7.8% Continuing Operations 11,311 12,256 8.4% Wholesale 38 40 5.3% Total Fourth Quarter Sales 11,349 12,296 8.3%
Source: ABN AMRO, company data
Table 5 : Woolworths – 2Q08 like-for-like growth
Like-for-like growth Growth (%) Food and Liquor 6.0% Food and Liquor (New Zealand) 5.7% Big W 3.6% Consumer Electronics 5.3%
Source: ABN AMRO, company data
Food and Liquor
■ Australian Supermarket sales increased 7.4% in 2Q08, with like-for-like sales growth of 6.0% (versus 7.6% in the 1Q08). While the strength of Woolworths’ like-for-like growth reflects continued market share gains, the growth rate has slowed slightly from the previous quarter. Given Woolworths’ outperformance, we suspect CGJ’s 1H08 sales growth remains well below that of Woolworths.
■ The 2Q08 food and liquor headline sales result was impacted by the transfer of New Years Eve trading, which moved into 3Q08 (from 2Q08) and lowered the total sales result for the quarter by 47 points. As such headline sales in 2Q08 would have been closer to 8%, than the 7.4% reported. The other factor impacting sales was cold and wet weather in December in the Northern states.
■ Food inflation increased slightly from 1.7% in 1Q08 to 2.4% in 2Q08. While increasing slightly, the level of inflation remains relatively low given the cost pressures of suppliers. A degree of discounting persists in the marketplace post the August/September ‘price war’, with Woolworths suggesting it has absorbed (within the gross margin) about 25% of cost increases negotiated by suppliers.
■ Assuming inflation of 2.4%, this implies volume growth was about 3.6% in 2Q08, a slowdown from the most recent quarters but still a solid outcome. While smaller in quantum, this still suggests a further up-tick in market share increases from its rivals, with CGJ reporting a 2.0% volume decline in 4Q07 (which crossed over the aggressive discounting period in August).
■ WOW’s NZ supermarkets reported like-for-like sales growth of 5.7% (in local currency terms), however the cycling of the industrial dispute failed to result in a significant sales boost. Overall the NZ result was somewhat disappointing with top-line sales growth of 3.0% essentially reflecting price inflation in the region (also 3.0% for 2Q08).
■ Petrol sales increased 14.5% given a 13% increase in petrol prices compared to the pcp. Comparable petrol volumes declined 1.3% reflecting lower demand with increased pricing
WOOLWORTHS 30 JANUARY 2008 4
INVESTMENT VIEW
General Merchandise
■ Following an abnormally strong 1Q08 (16.6% organic growth), Big W sales growth returned to a more maintainable level, an impressive 10.6%. Overall growth levels have improved significantly over the past 12 months following modifications to format and range. Headline sales growth of 10.6% in 2Q08 (13.1% for 1H08), is likely to far outstrip sales growth achieved by major format competitors Kmart and Target.
■ Big W’s value proposition, upcoming refurbishments and re-branding planned from 2Q08 should see like-for-like sales growth sustained in the mid-single digits for some time. The improving brand recognition and impact associated with new store openings should translate into an improved outlook for the Big W business. The business has struggled to deliver meaningful profit growth over the past two years.
■ We expect 3Q08 sales for Big W to be slightly weaker than 2Q08. We believe significant clearance activity was required to remove inventory from the system, with WOW indicating a clean inventory position currently.
■ Woolworths’ Consumer Electronics offering remains the smallest contributor to WOW’s bottom line, but continues to deliver double-digit sales growth. Sales increased 15.7% in 2Q08, while comparable store sales growth increased 5.3%.
Hotels – strong result given the circumstances
■ Woolworths’ Hotels business remains a significant opportunity for the group. WOW invested further in the business, through a number of Hotel acquisitions. ALH reported sales growth of 7.8% in 2Q08, with comparable sales increasing 2.3%. A solid result given full smoking bans were introduced in South Australia on 31 October. This added to the introduction of full smoking bans in NSW and Victoria from 1 July 2007.
■ Gaming sales increased 3.1%, down slightly from 4.3% growth reported in 1Q08. Given about 60% of WOW’s hotel portfolio has been impacted by the roll-out of full smoking bans in 1H08, we believe gaming revenue growth is unlikely to exceed current levels in the near-term.
■ Overall sales growth was boosted by the acquisition of nine hotels during the quarter totalling in excess of A$180m. Future sales growth will be boosted by WOW’s hotel refurbishment programme. We estimate about 30% of the hotel portfolio remains un-refurbished, which should allow for continued upside in sales growth going forward.
■ We expect Woolworths to outlay c.A$300m on Hotel acquisitions in FY08, including A$180m in 1H08 following the acquisition of nine Hotels.
WOOLWORTHS 30 JANUARY 2008 5
INVESTMENT VIEW
WOW – financial summary Year to 30 Jun (A$m) AIFRS AIFRS AIFRS AIFRS AIFRS Closing price (A$) 29.50Price target (A$) 34.80 Income statement 2006A 2007A 2008F 2009F 2010F Valuation metrics Divisional sales 37734.1 42477.0 46023.6 50089.9 54343.6 Preferred methodologyBlended SOTP, DCF Val'n (A$)$ 34.80 Total revenue 37849.6 42607.0 46164.4 50243.3 54509.9 DCF valuation inputs EBITDA 2244.3 2700.6 3159.5 3585.0 3978.6 Rf 5.75% 10-year rate 5.75% Depreciation -522.2 -589.3 -702.4 -779.0 -832.1 Rm-Rf 4.75% Margin 0.7% EBITA 1722.1 2111.3 2457.1 2806.0 3146.5 Beta 0.80 Kd 6.45% Amortisation/impairment 0.0 0.0 0.0 0.0 0.0 CAPM (Rf+Beta(Rm-Rf)) 9.6% Ke 9.6% EBIT 1722.1 2111.3 2457.1 2806.0 3146.5 E/EV*Ke+D/EV*Kd(1-t) NPV cash flow (A$m) 44963.5 EBIT(incl associate profit) 1722.1 2111.3 2457.1 2806.0 3146.5 Equity (E/EV) 70.0% Minority interest (A$m) 277.0 Net interest expense -249.7 -233.6 -172.9 -166.4 -120.9 Debt (D/EV) 30.0% Net debt (A$m) 2609.4 Pre-tax profit 1472.4 1877.7 2284.2 2639.6 3025.6 Interest rate 6.45% Investments (A$m) 256.0 Income tax expense -445.8 -566.4 -685.3 -785.3 -904.7 Tax rate (t) 30.0% Equity market value (A$m 42333.1 After-tax profit 1026.6 1311.3 1598.9 1854.3 2121.0 WACC 8.0% Diluted no. of shares (m) 1214.6 Minority interests -12.1 -17.3 -18.0 -18.0 -21.6 DCF valuation (A$) 34.85 NPAT 1014.5 1294.0 1580.9 1836.3 2099.4 NPAT post abnormals 1014.5 1294.0 1580.9 1836.3 2099.4 Multiples 2007A 2008F 2009F 2010F Enterprise value (A$m) 39509.1 39846.6 39521.6 38408.2 Divisional sales revenue 2006A 2007A 2008F 2009F 2010F EV/Sales (x) 0.9 0.9 0.8 0.7 Supermarkets (Aus) 25458.0 27745.0 30039.4 32803.1 35588.7 EV/EBITDA (x) 14.6 12.6 11.0 9.7 Supermarkets (NZ) 2605.0 3940.0 4226.3 4460.4 4864.1 EV/EBIT (x) 18.7 16.2 14.1 12.2 Petrol 4390.0 4837.0 5056.2 5309.0 5759.8 PE (pre-goodwill) (x) 28.3 23.7 20.4 17.9 General merchandise 3119.1 3465.0 3932.3 4482.9 4863.6 PEG (pre-goodwill) (x) 2.3 1.9 1.6 1.4 Consumer electronics 1167.0 1310.0 1491.8 1649.1 1789.2 ALH 850.0 1032.0 1122.3 1223.3 1327.2 At target price 2007A 2008F 2009F 2010F Wholesale 145.0 148.0 155.2 162.2 176.0 EV/EBITDA (x) 16.4 14.1 12.4 10.9 PE (pre-goodwill) (x) 32.0 26.7 23.1 20.2 Divisional EBIT 2006A 2007A 2008F 2009F 2010F Supermarkets (Aus) 1285.9 1597.1 1831.5 2098.4 2353.0 Comparable company data (x) 2008F 2009F 2010F Supermarkets (NZ) 108.9 155.1 179.6 199.6 225.8 Wesfarmers EV/EBITDA 13.0 9.2 8.6 Petrol 53.1 82.9 86.0 90.3 101.2 Year to 30 Jun EV/EBIT 17.2 12.3 11.6 General merchandise 123.1 138.6 161.8 189.4 212.4 PE 18.8 16.4 15.2 Consumer electronics 64.0 66.8 82.0 90.7 101.7 PEG 1.8 1.6 1.5 ALH 151.1 183.7 222.9 245.9 275.8 Metcash EV/EBITDA 10.6 9.5 8.9 Wholesale 1.8 2.5 2.3 2.4 2.7 Year to 30 Apr EV/EBIT 11.8 10.5 9.9 Corporate/Other -84.1 -91.6 -88.9 -90.7 -101.7 PE 17.0 15.4 14.2 Property 18.3 -23.8 -20.0 -20.0 -22.4 PEG 2.3 2.1 1.9
Cash flow statement 2006A 2007A 2008F 2009F 2010F Per share data 2007A 2008F 2009F 2010F EBITDA 2244.3 2700.6 3159.5 3585.0 3978.6 No. shares 1189.4 1214.6 1217.6 1220.6 Change in working capital 956.1 136.4 94.8 84.6 101.5 EPS (cps) 108.8 130.2 150.8 172.0 Net interest (pd)/rec -253.2 -249.8 -172.9 -166.4 -120.9 EPS (normalised) (c) 108.8 130.2 150.8 172.0 Taxes paid -475.3 -522.4 -536.3 -631.5 -703.1 Dividend per share (c) 74.0 87.5 101.5 116.0 Other oper cash items -766.9 229.4 0.0 0.0 0.0 Dividend payout ratio (%) 68.0 67.2 67.3 67.4 Cash flow from ops (1) 1705.0 2294.2 2545.0 2871.7 3256.1 Dividend yield (%) 2.4 2.8 3.3 3.8 Capex (2) -1411.7 -1113.4 -1750.0 -1040.0 -900.0 Disposals/(acquisitions) -1315.2 574.2 0.0 0.0 0.0 Growth ratios 2007A 2008F 2009F 2010F Other investing cash flow 1.0 -185.9 -35.8 -33.3 -39.0 Sales growth 12.6% 8.3% 8.8% 8.5% Cash flow from invest (3) -2725.9 -725.1 -1785.8 -1073.3 -939.0 Operating cost growth 12.1% 7.8% 8.5% 8.3% Incr/(decr) in equity 23.7 47.4 0.0 0.0 0.0 EBITDA growth 20.3% 17.0% 13.5% 11.0% Incr/(decr) in debt 1078.7 -999.5 143.7 -325.0 -1113.3 EBITA growth 22.6% 16.4% 14.2% 12.1% Ordinary dividend paid 0.0 -355.2 -967.9 -1138.4 -1324.3 Divisional EBIT growth Other financing cash flow 17.2 8.5 -34.6 -200.2 287.3 Supermarkets (Aus) 24.2% 14.7% 14.6% 12.1% Cash flow from fin (4) 1119.6 -1298.8 -858.8 -1663.6 -2150.3 Supermarkets (NZ) 42.4% 15.8% 11.1% 13.1% Inc/(decr) cash (1+3+4) 92.0 263.6 -99.6 134.8 166.7 Petrol 56.1% 3.7% 5.0% 12.1% Equity FCF (1+2) 293.3 1180.8 795.0 1831.7 2356.1 General merchandise 12.6% 16.7% 17.1% 12.1% Consumer electronics 4.4% 22.7% 10.7% 12.1% Balance sheet 2006A 2007A 2008F 2009F 2010F ALH 21.6% 21.4% 10.3% 12.1% Cash & deposits 525.9 798.8 605.0 605.0 605.0 EBIT growth 22.6% 16.4% 14.2% 12.1% Trade debtors 432.9 484.7 517.3 566.9 613.0 NPAT growth 27.6% 22.2% 16.2% 14.3% Inventory 2316.1 2739.2 2796.7 3134.9 3351.6 Pre-goodwill NPAT growth 27.6% 22.2% 16.2% 14.3% Investments 59.5 256.0 256.0 256.0 256.0 Pre-goodwill EPS growth 19.7% 19.6% 15.9% 14.0% Goodwill 4759.4 5003.5 5003.5 5003.5 5003.5 Normalised EPS growth 19.7% 19.6% 15.9% 14.0% Fixed assets 4055.8 4623.0 5670.6 5931.6 5999.5 Other assets 1196.8 510.9 532.2 590.4 634.5 Operating performance 2007A 2008F 2009F 2010F Total assets 13346.4 14416.1 15381.3 16088.3 16463.0 Asset turnover (%) 76.5 77.2 79.6 83.5 Short-term borrowings 612.3 379.8 566.5 532.0 623.0 EBITDA margin (%) 6.4 6.9 7.2 7.3 Trade payables 3573.4 4184.7 4369.6 4842.0 5206.3 EBIT margin (%) 5.0 5.3 5.6 5.8 Long-term borrowings 3704.0 2690.9 2647.9 2357.4 1153.0 Net profit margin (%) 3.0 3.4 3.7 3.9 Other liabilities 1199.1 1646.0 1596.9 1421.7 1714.1 Return on net assets (%) 38.3 39.6 40.5 40.5 Total liabilities 9088.8 8901.4 9180.9 9153.1 8696.4 Net debt (A$m) 2271.9 2609.4 2284.4 1171.0 Preference shares 0.0 0.0 0.0 0.0 0.0 Net debt/equity (%) 41.2 42.1 32.9 15.1 Share capital 2947.8 3422.7 3467.6 3467.6 3484.7 Net interest/EBIT cover (x) 9.0 14.2 16.9 26.0 Retained earnings 1455.7 1962.5 2565.7 3265.0 4040.0 ROIC (%) 18.4 22.1 22.3 23.9 Other equity -375.7 -109.9 -109.9 -109.9 -109.9 Total equity 4027.8 5275.3 5923.4 6622.7 7414.8 Internal liquidity 2007A 2008F 2009F 2010F Minority interest 229.8 239.4 277.0 312.6 351.7 Current ratio (x) 0.8 0.7 0.7 0.7 Total shareholders' equity 4257.6 5514.7 6200.4 6935.2 7766.6 Receivables turnover (x) 92.6 91.9 92.4 92.1 Total liabilities & SE 13346.4 14416.1 15381.3 16088.3 16462.9 Payables turnover (x) 10.3 10.0 10.1 10.0
Source: Company data, ABN AMRO forecasts
WOOLWORTHS 30 JANUARY 2008 6
RESEARCH TEAM
ROGER LEANING - Head of Research JOSEPHINE LITTLE - Analyst ROBERT BITOMSKY - Analyst ROSS MACLEOD CAREY - Analyst CHRIS BROWN - Senior Analyst BELINDA MOORE - Senior Analyst FIONA BUCHANAN - Senior Analyst SCOTT POW ER - Senior Analyst NICK HARRIS - An al yst TOM SARTOR - Analyst LINDSAY HURST - Retail Strategy Analyst TAMARA STRETCH - Analyst MICHAEL KNOX - Director of Strategy & Chief Economist TANYA SOLOMON - Analyst JAMES LAWRENCE - Fixed Interest Analyst REBECCA SULLIVAN - Retail Strategy
ABN AMRO MORGANS OFFICES BRISBANE (07) 3334 4888 CHATSWOOD (02) 9411 8988 BUNDABERG (07) 4153 1050 COFFS HARBOUR (02) 6651 5700 BURLEIGH HEADS (07) 5520 8788 GOSFORD (02) 4325 0884 CAIRNS (07) 4052 9222 HURSTVILLE (02) 9570 5755 CALOUNDRA (07) 5491 5422 MERIMBULA (02) 6495 2869 CAPALABA (07) 3245 5466 NEUTRAL BAY (02) 8969 7500 CHERMSIDE (07) 3350 9000 NEWCASTLE (02) 4926 4044 EMERALD (07) 4988 2777 NEWPORT (02) 9998 4200 GLADSTONE (07) 4972 8000 ORANGE (02) 6361 9166 GOLD COAST (07) 5592 5777 PARRAMATTA (02) 9615 4500 IPSWICH (07) 3202 3995 PORT MACQUARIE (02) 6583 1735 MACKAY (07) 4957 3033 SCONE (02) 6545 9811 MILTON (07) 3114 8600 WOLLONGONG (02) 4227 3022 MISSION BEACH (07) 4088 6188 MELBOURNE (03) 9947 4111 NOOSA (07) 5449 9511 BERWICK (03) 9796 2676 REDCLIFFE (07) 3897 3999 BRIGHTON (03) 9592 4555 ROCKHAMPTON (07) 4922 5855 CAMBERWELL (03) 9813 2945 SPRINGWOOD (07) 3808 7588 GEELONG (03) 5222 5128 SUNSHINE COAST (07) 5479 2757 TRARALGON (03) 5176 6055 TOOWOOMBA (07) 4639 1277 WARRNAMBOOL (03) 5559 1500 TOWNSVILLE (07) 4771 4577 CANBERRA (02) 6232 4999 YEPPOON (07) 4939 3021 ADELAIDE (08) 8464 5000 SYDNEY (02) 8259 6400 PERTH (08) 9261 0888 ARMIDALE (02) 6772 1288 BUNBURY (08) 9791 9188 BALLINA (02) 6686 4144 DARWIN (08) 8981 9555 BALMAIN (02) 8755 3333 HOBART (03) 6236 9000
DISCLAIMER - ABN AMRO MORGANS LTD This report was prepared as a private communication to clients and was not intended for public circulation or publication or for the use of any third party, without the approval of ABN AMRO Morgans Ltd (“ABN AMRO Morgans”). While this report is based on information from sources which ABN AMRO Morgans considers reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect ABN AMRO Morgans judgment at this date and are subject to change. ABN AMRO Morgans has no obligation to provide revised assessments in the event of changed circumstances. ABN AMRO Morgans, its directors and employees do not accept any liability for the results of any actions taken or not taken on the basis of information in this report, or for any negligent misstatements, errors or omissions. This report is made without consideration of any specific client’s investment objectives, financial situation or needs. Those acting upon such information without first consulting one of ABN AMRO Morgans investment advisors do so entirely at their own risk. It is recommended that any persons who wish to act upon this report consult with an ABN AMRO Morgans investment advisor before doing so. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.
DISCLOSURE OF INTEREST ABN AMRO Morgans and/or its affiliated companies may make markets in the securities discussed. Further, ABN AMRO Morgans and/or its affiliated companies and/or their employees from time to time may hold shares, options, rights and/or warrants on any issue included in this report and may, as principal or agent, sell such securities. ABN AMRO Morgans affiliates may have acted as manager or co-manager of a public offering of any such securities in the past three years. ABN AMRO Morgans affiliates may provide or have provided banking services or corporate finance to the companies referred to in the report. The knowledge of affiliates concerning such services may not be reflected in this report.
The Directors of ABN AMRO Morgans advise that they and persons associated with them may have an interest in the above securities and that they may earn brokerage, commissions, fees and other benefits and advantages, whether pecuniary or not and whether direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities, and which may reasonably be expected to be capable of having an influence in the making of any recommendation, and that some or all of our Proper Authority holders may be remunerated wholly or partly by way of commission.
RECOMMENDATION STRUCTURE
Absolute performance, long-term (fundamental) recommendation: The recommendation is based on implied upside/downside for the stock from the target price. A Buy/Sell implies upside/downside of 10% or more and a Hold less than 10%. The target price is the level the stock should currently trade at if the market accepted the analyst’s view of the stock, provided the necessary catalysts are in place to effect the change in perception. If it is felt that the catalysts are not fully in place to effect a re-rating of the stock to its warranted value the target price will differ from ‘fair’ value. Given the volatility of share prices and our pre-disposition not to change recommendations frequently, these performance parameters should be interpreted flexibly. Performance in this context only reflects capital appreciation and the horizon is 12 months.
For listed property trusts (LPTs) the recommendation is based upon the target price plus the dividend yield, ie total return. A Buy implies a total return of 10% or more; a Hold 5-10%; and a Sell less than 5%.
Absolute performance, short-term (trading) recommendation: The Trading Buy/Sell recommendation implies upside/downside of 3% or more. The trading recom mendation time horizon is 0-60 days.
Each stock has been assigned a Volatility Rating to assist in assessing the risk of the security. The rating measures the volatility of the security's daily closing price data over the previous year relative to other stocks included in either the S&P/ASX200 Index (large caps) or the Small Ordinaries Index (small caps) of which it is a member. This rating is a quantitative (objective) measure provided as an additional resource and is independent of the qualitative research process undertaken by our research analysts.
A rating of Low indicates very little movement in price over the previous year (Coefficient of Variation < 4 for small caps or < 5 for large caps). A Moderate rating implies average price movement over the previous year (Coefficient of Variation of 9 - 21 for small caps or 7.25 - 15 for large caps). A High rating implies significant price movement over the past year (Coefficient of Variation greater than 25 for small caps or 35 for large caps).
REGULATORY DISCLOSURES Subject companies: WOW.AX
In the ordinary course of their business, ABN AMRO and its affiliates may effect transactions for their own account or for the account of their customers and hold long or short positions in the securities of this company or related derivatives. In addition, ABN AMRO and any of its affiliates may engage in market-making activities in relation to the securities of this company or related derivatives and may enter into transactions in the securities of the company or related derivatives which may affect the market price, liquidity or value of the securities of this company.: WOW.AX.
PRIVACY Personal information held by ABN AMRO Morgans Ltd may have been used to enable you to receive this publication. If you do not wish your personal information to be used for this purpose in the future please advise us, including your account details to your local ABN AMRO Morgans Ltd office or to Reply Paid 202, GPO Box 202 Brisbane Qld 4001.
WOOLWORTHS 30 JANUARY 2008 7