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Bcom Hons. Financial Analysis and Portfolio Management

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BCom Hons. Financial Analysis and Portfolio Management.  

Module:

Economics – ECO4105

Group:

 Group

Project Topic:

Bottom-up fundamental Analysis of Woolworths Holdings Limited


Table of Contents

1.        Introduction        1

2.        Woolworths at a Glance        1

3.        SWOT Analysis        2

4.        Porter’s Five Forces        3

5.    Macro backdrop…………………………………………………………….4

6.        Conclusion        4

7.        References        5

APPENDIX A: ……………………………………………………………………….6

APPENDIX B: ……………………………………………………………………….7


  1. Introduction

The aim of this report is to assess Woolworths Holdings Limited (WHL) and its current environment, its business performance, prospects and investment potential. This report will take a bottom-up approach where the SWOT analysis and Porter’s Five Force model will be used in the assessment of WHL. Coupled with Macro analysis and Market valuation, the aim is to determine potential upside to WHL current market valuation.  

  1. Woolworths at a Glance

Woolworths Holdings Limited (WHL) is a JSE listed South African based retailer that operates in two segments, clothing and groceries. The company has, over time, expanded to become a large diversified Southern hemisphere retailer with operations in South Africa, Australia and New Zealand. Table 1 summarizes WHL business model as of financial year 2016.   WHL SA Stable contributes the most towards revenue and profit as shown in figure 1.

Table 1: Woolworths Holdings business model 

WHL Retail

David Jones

Country Road

Product Offering

WHL retail is SA based and offers premium quality food and clothing.  

DJ is an Australian based retail and fashion division of WHL.

Country road is Australian department store retailer.

Ownership

Wholly Owned

Wholly Owned

Wholly Owned

Established

1931

1974

1838

Geographic mix

SA

Australia, New Zealand

and SA.

Australia

Private Label Brands

WHL, Studio W, RE, JTOne.

David Jones

Country Road, Trenery,

Witchery, Mimco

LSM Mix

LSM 8 -10

LSM 8-10

LSM 8-10

Figure 1: WHL Revenue and Profit before tax split.

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Source: Company Data.


  1. SWOT Analysis

For internal company analysis we used SWOT analysis.  The SWOT analysis will help us in assessing the effectiveness of management’s strategy.  This is the outcome of our SWOT Analysis on Woolworths Holdings Limited: 

Strengths

  1. Exposure to the highest income bracket - most resilient consumer group
  2. Higher perceived product quality
  3. Very strong and Efficient Distribution centers – makes their route to market easier.
  4. Diversification by product line - more defensive vs. other retailers offering clothing only.
  5. Diversification by geography – diversifying country specific risk.
  6. They offer Higher Profitability/Margin WHL branded products.
  7. Healthy Cash Conversion  

Weaknesses

  1. David Jones synergies not coming through – DJ value written down.
  2. Fashion – lagging competitors.
  3. SA Clothing margins are under pressure.
  4. Investor returns have fallen after the DJ acquisition –  this conclusion is based on the calculation of return on equity and return on capital employed 

Opportunities

  1. Rolling out David Jones Food halls in Aus. – opportunity to imitate SA Food business. ($100m over 3 years).
  2. Online Platform expansion and Data Analytics – heavy investment by WHL. This will help WHL understand customers better.
  3. Redevelopment of DJ Elizabeth Street store to be completed by 2019 – Possibility of extra synergies.

Threats

  1. Pricing uncompetitive – Invites PnP and Checkers
  2. E-commerce impact – The likes of Amazon mainly entering the Market.
  3. Huge Debt Position – Interest rate change impact.
  4. Currency risk like many companies exposed to other countries.
  5. Political Uncertainty in SA

        

Based on the analysis there many synergistic opportunities that can unlock value for Woolworths shareholders. Weaknesses highlighted, mainly the David Jones one, are no stranger to Retail companies as most companies tend to fail when moving to other jurisdictions.  Woolworths strategy has worked very well in SA, mainly SA food.  I think Woolworths can turn key weaknesses into positive.

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