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This assignment relates to the financial analysis of a publicly listed company in Australia. It aims at understanding the methods and processes of financial analysis and valuation of shares of a company considering the risks and returns from its investments. The assignment aims at developing the analytical skills for comparison of financial performance of company in the industry and develops ability to calculate value of its shares through stock movement analysis and dividend track record of company. The selected company is Coles which is a supermarket in Australia and one of the largest companies in the food and grocery industry of Australia. The company is the subsidiary of Wesfarmers Limited. The first store was opened in the year 1914 after which Coles became the iconic supermarket of Australia. It is retailer supermarket with many brands such as Coles Supermarkets, Coles Express, Liquorland, Vintage Cellars, Spirit Hotels, Coles Financial Services, Coles Online and First Choice Liquor. Coles provides fresh food, groceries, general merchandise, liquor, fuel etc marked with high quality supplier standards and safety norms to more than 20 million customers every week through sales of its products at network of stores as well as online platforms. Company has a team of more than 1, 00,000 members and around 2,386 retail outlets in Australia. These stores include 776 supermarkets, 858 liquor stores, 92 hotels and 662 convenience outlets for customers. As at 30 June 2015, Coles financial services has more than 440,000 insurance policies related to home, car, life and landlord insurance. Coles issued first sourcing policy in Australia for supporting Australian farmers and manufacturers. Fresh fruits and vegetables amounting to 96% are sourced from Coles grown in Australia along with 100% fresh milk and 100% fresh meat. Coles entered into a contract with the supplier Bundaberg Sugar for supply of 100% Australian grown sugar to its customers.
The strategic vision of Coles is to offer trusted and greater value to its customers who visit the supermarkets or avail its online services by reducing the prices of its weekly shopping basket and improving the quality of products through fresher produce. The company has planned to enter into long-term contracts with its suppliers to provide an excellent shopping experience to customers. For this purpose the proposed processes include store upgrades through innovation and latest technologies and provide training to staff for effective services. The key strategies to be focused by the company mainly includes deliver a better store network, focus on freshness, provide trusted value, expansion of channels and services, transformation of liquor business, build better careers and simplification of its supply chain management and operations. In April 2015 the company announced Coles Nurture Fund which aims at providing support and assistance to Australian producers, farmers and manufacturers by providing innovation techniques of farming and growing food. During the next five years this fund propose to allocate an amount of 50 million dollars in grants and interest free loans to fund small businesses and enable them develop products which can lead markets as a result of their latest technologies and processes. The company is keen towards the accomplishment of its Corporate Social Responsibility. The company has many competitive advantages and strengths which indicates the long term growth and sustainability of company.
Shareholders and ownership structure
As at 30 June 2015, there were no shareholders in the company having shareholdings more than 20% of the total issued share capital. There were four shareholders in the list of 20 substantial shareholders having the shareholdings exceeding 5% of the total issued share capital of the company. The shareholders having more than 5% shareholding in the company as extracted from the register of members as on 17 September 2015 is as follows:
Number of shares
% of issued capital
HSBC Custody Nominees (Australia) Limited
JP Morgan Nominees Australia Limited
National Nominees Limited
Citicorp Nominees Pty Limited
Directors and Director Independence
The Managing Director of Coles is Mr John Durkan. He is an independent director of company and does not have any pecuniary relationship with the company other than his office of Director. Other directors holding office of the company as at 30 June 2016 included the following:
1. R L Every (Chairman)
2. R J B Goyder (Group Managing Director
3. T J Bowen (Finance Director)
4. P M Basset
5. M A Chaney (Chairman elected from 1st June 2015)
6. J P Graham
7. A J Howarth
8. W G Osborn
9. D L Smith Gander
10. V M Wallace
11. J A Westacott
As at 30 June, 2015 on review of position and relationships of directors it was found that eight out of nine non-executive directors of company are independent and Chairman is also independent. Mr. James Graham was dependent due to his holding of position of Chairman at Gresham Partners Limited which is the investment advisor of the company. Ms. Vaneca Wallace who was previously considered dependent by virtue of her association with PwC providing professional services to the company was also held independent as she did not have any involvement in the operations in Australia of PwC.
Committees of Board
The Board of the company is composed of professionals who are committed towards their work and strive to provide satisfactory returns to the shareholders and fulfil the obligations of company in relation to Corporate Governance. They perform their roles and responsibilities in the best interest of Coles and its stakeholders. The following are the Committees of Board framed under the Corporate Governance mechanism and their role in the company:
Nomination Committee - It is responsible for Board Succession Planning by identification of suitable candidates and arranging to fill the vacancies of Board as and when they arise. It mainly recommends the candidature of proposed candidates to the Board for appointments. In every two years, it conducts formal reviews of the performance of Board by external consultant. The major focus areas of nomination committee includes Chairman succession planning, scheduling of performance reviews, consideration of feedbacks and endorsement of revisions in Nomination Committee Charter in order to obtain approval from Board.
Remuneration Committee – The responsibility of this committee includes framing and implementing the overall remuneration policy of the company. The significant focus areas of this committee includes making recommendations about fixed remuneration, annual incentives and long-term rewards, review of remuneration policy and terms of employment, review thaw performance metrics and variable remuneration structure, monitoring the targets for diversity and gender pay equity and endorsement of Remuneration Committee Charter.
Audit and Risk Committee – The responsibilities of this committee include monitoring and evaluation of internal control policies which aim at the safeguarding of assets in order to maintain the integrity and accuracy of financial reporting by the company, review recognition and compliance of applicable Accounting Standards and industry practices, review of commercial income recognition and allocation of expenses, monitoring the cyber security framework and structure of reporting and evaluate the appropriateness of the insurance arrangements and policies of the company (Pierson, 2015).
Earnings and Cash Flow
Analysing Existing Investments and Financial Returns
Earnings, Revenue and Capital Expenditure
The operating revenues of the company during the year 2015 increased to 38.2 billion dollars as compared to 810 million dollars in the previous year. The earnings of the company increased at the rate of 6.6% up to $ 1,783 million from $1,672 million in the year 2014. However the earnings of 2014 exclude a provision of $94 million in relation to future Liquor restructuring activities proposed by the company... The capital expenditure of the company has decreased during the year from $1,018 million to $937 million. The following graph shows the comparison of earnings and Capital Expenditure of the company for five years:
Financial Return and Ratios
Return on Assets (%)
Return on Capital Employed (%)
Return on Equity (%)
Operating profit Margin (%)
Asset turnover ratio
Earnings per share ($)
Dividend Per Share ($)
Free Cash Flow per share ($)
From the above analysis of financial ratios of Coles, it can be observed that the company is earning low returns for its investors as compared to its cost of equity which is 10.13%. The return on capital employed or return on investment has increased to 11% as compared to 10.3% in the previous year. However the return on assets is constant and the return on equity has declined. Also the company is earning profits from its operations. The company has a track record of payment of dividend to its shareholders. Thus the investors of the company have been earning good returns on their investments in the company but the returns are now declining and the company is not even able to recover its cost of capital (Alin, 2014).
Competitive strengths and differential advantages
From the above graph it can be observed that the EBIT of the company is increasing for the last five years and thus it is likely to increase in the future. The capital expenditure of the company tends to decline after rise in the year 2012. The company has the competitive advantage of increased earnings regularly. The strength to gain the competitive advantage is the continued investment by the company in the operational efficiencies with lower prices as compared to other companies operating in the industry. Other differential advantages with the company include its product quality and safety. The manufacturing supplier standards for food were updated by the proposed to be relaunched to suppliers in next year which will ensure quality and safety of company products, adherence to packaging and other claims including animal welfare and sustainability. Apart from this Coles has a direct community support of $36.5 million and additional contribution of $7.2 million made by customers, team members and suppliers. The company achieved the milestone of distributing 10 million kg fresh food to people in need which is equivalent to 20 million meals which is the highest strength of company with regards to its Corporate Social Responsibility. Another highlight to gain competitive advantage for Coles is achieving first Green star rating by any supermarket in Australia as 4 Green stars given by Green Building Council of Australia to Coles Hallam located in Melbourne (Simoes, 2014). In the Australian food and grocery industry there is a high competition and is expected to remain so therefore the competitive strengths and differential advantages of Coles as compared to other supermarkets such Aldi, TESCO, Lidl, Woolworth etc will help in the growth and long-term success of the company. The market share of Coles in the food and grocery industry of Australia is 33.5% as compared to ALDI with 10.3% and Woolworths with 33.5%.
The comparison of financial ratios and market performance of Coles with its competitor Woolworths is as follows:
Operating Profit Margin (%)
Market Share (%)
On the basis of above analysis of company with its competitor Woolworths which is also a giant supermarket in the food and grocery industry in Australia, it can be observed that the company has to achieve its competitive advantages in order to achieve better results than its competitors. The Earnings per share of Woolworths is more than Coles, also it has a large market share. The operating profit of the company is also less than Woolsworth. Thus in order to survive within the competition Coles has t9za9zawo focus more on achieving the differential advantages and attaining long-term sustainability and growth through its core competencies and competitive advantages (Jofre, 2014).
Sustainability of Competitive Strengths
The competitive strengths possessed by the company could be sustained with the Coles commitment towards customer led strategies and policies to deliver trusted value. Coles focus its efforts to maintain its core competency by improving productivity in order to increase price investment with the purpose of reducing the cost of products within the store for customers. The company is proposed to continue the improvement and updating of its store and fresh food standards and levels of service to customers at the store. The company tends to achieve the sustainable growth through increasing investment and innovation of its operations by expanding its network of stores and enhancing platforms for online, financial services and flybuys business. The differential advantage of transformation and reshaping of the liquor business and optimising product range for an overwhelming customer experience will be a contributing factor towards the sustainable growth of company (Valickova, 2015).
Risk and Valuation
Risk Profile of Coles
The risk profile of company includes those factors which can affect the operations of business and smooth functioning of these operations. The network of stores and customer value are the core resources of the company which play a crucial role in achieving the key strategies. Thus, any change that may affect these factors has the potential to harm the growth potential and long term sustainability of the company. These factors may include changes in the competitive intensity of company within the food and grocery industry and markets within Australia and other external factors such as regulations and compliances. The major risks that can be included in the risk profile of company and the proposed strategies for mitigation of those risks are as follows:
Limitation on Coles’ ability to achieve profitable growth due to increased competitive intensity in market.
It is proposed to reduce the costs of products to enable funding of other investments by simplification of its business operations. The plan is to enter into long-term contracts with major suppliers so as to improve its focus on supply of fresh food products. As far as financial risk with respect of stores is concerned in case of not achieving the profitable growth objectives, the company has appropriate lease structures and management practices for managing the tenure and existence of these stores in extreme circumstances. A capital investment approach is proposed to fill the network gaps existing in the network of stores by establishing a new store pipeline. This is a key priority and focused approach to secure the capital investment.
Attracting new talent, retention of existing influential leaders and succession of key managerial personnel and job roles and responsibilities
During the initial phase of the company being in operation, due to large turnover of staff and employees effective planning for succession of managers and employees and implementation of career development activities resulted in an effective leadership transition for Coles. This transformation will ensure retention of senior leadership and key job roles within the company. Thus the company proposed to focus on new initiatives for staff retention and advancement of areas having major responsibilities.
Regulatory changes and compliance requirements which can affect growth and value offer
The company has in past worked constructively for the implementation and development of the Food and Grocery Code, as a result of which it became a signatory from 1 July 2015. This is the strength of Coles which can help it in dealing with the threats and risk related to regulatory changes and compliances. Apart from this Coles declared Code of conduct and Coles Supplier Charter in August 2014 in order to ensure transparency in the relationship with suppliers. The Supplier code encourages the commercial transactions and commercial conduct to be performed in good faith by both parties. It will focus on the procurement of quality products from suppliers with compliance of food and safety standards which will assist in dealing with the risks related to regulatory changes (Egorykshina, 2015).
The gearing ratios of Coles for last five years are represented as follows:
Debt to Equity Ratio
Interest Coverage Ratio
From the above gearing ratios of Coles for the last five years, it can be observed that the capital structure of Coles is optimum with less debt to equity ratio indicating lesser risks associated with the debt financing. The financial leverage of the company has also remained constant for all these years which also indicate lesser risk profile. The interest coverage ratio also suggests sound liquidity position of company with lesser risks. During the last four years the current ratio of company is more than one which represents that the current assets of the company are sufficient to finance its current liabilities. However the current ratio declined during the year 2015 indicating in the current assets being more than the current liabilities affecting the liquidity position of the company (Cartney, 2011).
Risk Management Framework
Risk is a factor which is directly associated with the processes that include doing business. The risk management policies of Coles are such that they focus on identification, monitoring and mitigation of material risks that relates to the business of company and its operations and activities so as to achieve the objective of creating trusted long-term shareholder value. The risk management framework was approved by the Board in May 2015 after review which is done on an annual basis. The framework contains details of risk management controls that are incorporated within the risk management reporting system, processes and procedures. The allocation of risk management functions between the members of Board and Group Assurance and Risk responsibility divisions are also part of this framework. It includes the following:
1. Setting guidelines and standards for determining the criteria under which approval of expenditures can be made including separate guidelines for capital expenditure and investment expenditure.
2. Implementation of a Group Compliance Program in accordance with the standards that relate to safety, environment and legal liability, risk identification and mitigation, information technology, quantification and reporting, and financial reporting and internal controls.
3. Designing the policies and procedures for the monitoring and control of financial risk of company and treasury operations.
4. Implementing the budgetary systems and annual and monthly reporting systems
5. Designing and implementing the systems for crisis management for all the different types of businesses within the business and focusing on key risky operations.
6. A financial program which involves transfer of risk for mitigation purpose through entering into contracts with external insurers and reinsurance of existing insurance policies.
Valuation of Coles
Cost of Equity and Weighted Average Cost of Capital (WACC)
Cost of Equity
The cost of equity of company can be estimated using the Capital Asset Pricing Model (CAPM). As per CAPM,
Cost of Equity = Risk free rate of return + Beta of Asset * (Expected Return of market – Risk Free Rate of Return)
The 10 years Treasury constant maturity rate can be used as the risk free rate for the company. Therefore the Risk Free rate as per updated Treasury Constant Maturity Rate is 2.48%.
Beta of a company is the sensitivity of the expected returns on assets of the company with respect to expected market returns. It denotes the risk of the returns of company. The beta of Coles is 1.02.
The Market premium which is the difference between expected rate of return of market and the risk free rate is 7.5%.
Thus Cost of Equity = 2.48% + 1.02 * 7.5%
Cost of Debt
The cost of debt of the company can be estimated using the interest expense of the company by dividing it with latest two years average debt. The interest expense of the company is $227.98 and the average value of its debt is $5,221.33. Thus the cost of debt will be 227.98/5,221.13 = 4.36% (Elena, 2014).
Weighted Average Cost of Capital
WACC = Equity/ (Equity + Debt) * Cost of Equity + Debt/ (Equity + Debt) * Cost of debt (1-tax
= 36,982.145/ (36982.145 + 5,221.33) * 10.13% + 5,221.33/ (36982.145 + 5,221.33) * 4.36%
= 0.8763 * 10.13% + 0.1237 * 4.36% (1-44.97%)
Thus the Weighted Average cost of capital of the company for the year 2015 is 9.17%.
The current price of the company’s share is a$ 43.13 with one year % change upwards of 8.39%. The cost of equity of the company as estimated above using CAPM is 10.13%. The growth Rate of dividend is 4.50%. Using the Dividend Discount Model the price of the share of company can be estimated in order to evaluate that the share of the company is undervalued or overvalued in the market. The Price of company’s share using the DDM Model is calculated as follows:
Price of company’s share = Dividend at the end of year/ (Cost of equity – Dividend Growth Rate)
= 2(1+0.0450) / (0.1013-0.0450)
As per the Dividend Discount Model the price of the share of company in the market is estimated to be $37.12 whereas the current market price of company’s share is $43.13 which indicates that the share of company is overvalued and thus the investors will be better off if they create a short position for the shares of the company.
Stock Movement and Regression Analysis
From the above chart it can be observed that the price of the company’s share during the last 12 months was ranging from $44 to $36 as against the current price of $43.13. The 12 months high price of shares was observed to be $42 whereas the lowest was observed to be $39.37. The linear regression line is showing an increasing trend in the price of shares. Thus in the coming future it is likely that the price of company’s share will rise. However as per the DDM model it has been estimated that the share of company is overvalued and therefore within a short period of time the price of shares is expected to decrease so that they become correctly priced. Since the regression line is showing an increasing trend, therefore the investors on this basis can create long position in the market if they intend to hold their investment for a long period as the regression analysis relates to annual stock movement (Lim, 2015).
Share Price Forecast and Consensus recommendation
The share price and stock movement analysis of the company suggest that the share prices of company have a median target of $43 with a high target estimate of $58 and low target estimate of $33. The median target has a decrease of 0.09% as compared to the last price which is $43.04.
On the basis of regression analysis and in accordance with the consensus forecasts made by 14 polled investment analysts, the investors are recommended to hold their position in the company as suggested by majority of the investment analysts. The previous forecasts estimated that the company will outperform the market and as a result the sentiments of investment analysts deteriorated. Hence they now recommend holding the position.
During the year 2015 the Board of company declared a fully franked ordinary dividend of three hundred cents per share which included full year ordinary dividend of two hundred cents which is an increase of 5.3% as compared to the full ordinary dividend of 190 cents per share in the year 2014. The number of issued shares of the company decreased during the year by 19 million resulting in number of outstanding shares to be 1,124 million. The payment of dividend to shareholders by a company is a key component of investment analysis. The dividend policy of Coles aims at providing dividends at growing rates. The dividend of the company represents its cash position, profit generation and available franking credits. As most of the shareholders prefer to receive the dividend in the form of equity, therefore the directors of the company have decided to pay the dividends through Dividend investment Plan. Under this plan the allocated price of shares is calculated on the basis of average of daily volume weighted price of shares of company on each fifteen consecutive trading days and adding the third trading day after the record date (Isberg, 2013). The company will not allow any discount on the allocation price and the plan will not be underwritten. Since the company has a strong balance sheet and sound capital structure therefore the shares which will be issued as dividends under this plan will be purchased on market and transferr4ed to participants after that to maintain the position. In this way the dividend policy of the company aims at providing dividend in the form of equity through dividend investment plan. Also the company has a good track record of payment of dividend for last four years.
This report has been prepared with the purpose of conducting and presenting detailed financial analysis of the company Coles which a large chain of supermarkets within Australia. The analysis included various objectives that have been dealt with throughout the report under different headings and sections. The overview of the corporate governance has been provided as the first section of the report with the view to analyse the independence of the directors of the company and integrity and transparency in the financial reporting and performance of their roles and responsibilities with the company against the stakeholders. The substantial shareholders have been identified and it has been evaluated whether any director has been included in the list of substantial shareholders or is directly or indirectly related with these shareholders. The Board Committees have also been discussed in order to analyse the allocation of roles and responsibilities of the Board members. It can be concluded that only one director is dependent and the company has good corporate governance structure. After this the analysis of earnings and cash flows of company for the year 2015 has been done on the basis of information extracted from the annual report of the company. Under this analysis the financial ratios of the company have been calculated on the basis of which the evaluation has been made of the profitability and growth potential of the company. The financial ratios that measure the profitability and liquidity of the company have been calculated. It can be concluded that the company is earning average return for its investors during the period and has the growth potential. The performance of the company in the current year has declined as compared to the previous year. It can also be concluded that Coles has many core competencies and competitive advantages and gains which helps in the growth as compared to its peers and competitors. The analysis of sustainability of these differential advantages for long-term has also been discussed which concluded that the company has the ability to survive against competition due to its competencies and differential advantages.
The next section of the report deals with the risk of the company and the valuation of the shares of the company. The risk profile has been discussed in this section along with the strategies that can be used by the company to manage and mitigate these risks. The risk management framework declared and implemented by the company has also been discussed. It can be concluded that the company has a low risk profile and the risks can be mitigated and effectively dealt with the proposed risk management strategies to be implemented by the company within its risk management framework. The CAPM model has been used in this section to estimate the cost of equity of the company and on the basis of cost of equity the Weighted Average cost of capital of the company has been calculated. The Dividend Discount Model has been used to estimate the share price on the basis of dividend growth rate and cost of equity. It can be concluded that the shares of the company are overvalued. The regression analysis has been discussed and the stock movement and share price forecasts have been used to recommend the investors that they shall hold their position in the company as the share price is expected to rise in the short period of time. The dividend policy of the company has been discussed which aims at providing the dividend in the form of equity through Dividend Investment plan. It can be concluded on an overall basis that the company has a good liquidity position and growth potential even if the returns for the current year declines but the financial performance of the company is expected to improve.
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