A Broker's view: Woolworths

GRANT DAVIES
Last updated 05:00 15/02/2014

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OPINION: Company: Woolworths Limited

Sector: Consumer Staples

Overview: There has been plenty of discussion around the profitability, or lack thereof, of Countdown in New Zealand this week. From an investment perspective Woolworths Limited shareholders are probably not overly concerned at the kiwi boycott considering its New Zealand operations (Countdown, Freshchoice and Supervalue) made up just 7.5 percent of group sales in the second half of last year.

Interestingly, these sales contributed 6.4 percent of earnings before interest and tax. This illustrates profit margins are lower in New Zealand than those our cousins have to tolerate in the Lucky Country.

Pros: Looking past the current controversy, Woolworths enjoy a dominant position in the Australian market with 22 percent more floor space than its nearest rival Coles. The recent proliferation of Home Brand products has not only irritated traditional suppliers but has helped Woolworths undercut rival chains whilst maintaining margins. The current weakness of the Australian dollar means its New Zealand operations should perform well when translated back to AUD.

Cons: This Australian dollar weakness will have an impact on the costs of importing goods into Australia. The increased cost of imports in AUD terms could impact margins and could be part of the rationale for locking out some New Zealand suppliers. The aforementioned dominance in the market is under constant threat from new entrants with US based Costco the latest new entrant in the market. German company Aldi has enjoyed success increasing its market share from 5 percent in 2007 to over 10 percent according to the latest Roy Morgan research.

Price performance: Although the share price was up 15 percent in 2013, the appreciation of the NZD over that time means NZ investors were down slightly for the year.

Investment outlook: The strength of the NZD makes the Australian market a relatively attractive proposition for investors currently. Investors looking for a defensive blue chip should consider Woolworths as part of a diversified portfolio.

*A Broker's View is written by Grant Davies, Authorised Financial Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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