Strong US lead may push Asian markets higher
City Index May 30, 2012 5:20 PM
<p>Asian markets may trade higher today following strong leads from the US overnight. Despite new concerns in Spain and the fall in the Euro, US […]</p>
Asian markets may trade higher today following strong leads from the US overnight. Despite new concerns in Spain and the fall in the Euro, US and European markets registered gains last night.
In Australia, Wesfarmers will hold its investor day today and the presentation will provide a detailed look at the strategy behind the group’s operations.
In terms of Coles, today’s focus is on putting the recent turnaround into perspective – no real surprise in terms of comments or numbers. What caught our eye is the 2% net floor space growth target over the next few years which means Coles is likely to continue expanding its network on a net basis.
This sends a signal to Woolworths that the recent price war is unlikely to bed down anytime soon.
On Bunnings, the group says it is likely to open another 18 Bunnings warehouse sites in 2013 with around 80 sites in the overall pipeline to come online over the next few years. This business is far from maturity and again sends a strong message to Woolworths that its Masters concept has a lot of catching up to do.
Our other focus is on Target and the comments around that business. This might seem odd but we note Target’s earnings decline has been a major drag on the group and its an area of immediate focus for management.
The comments here might disappoint – competition is unlikely to abate anytime soon and a new strategic agenda is expected to be implemented over the next four years – so no quick fix for Wesfarmers. More hard work but at least there is a solid strategy to turn things around.
Bottom line: The presentation doesn’t contain any smoking gun which impacts current earnings estimates of valuation but it does provide a great insight into the strategic plan behind Wesfarmers and this is what many investors are looking for when weighing up the choice between investing in Wesfarmers or investing in Woolworths.
Food and liquor competition is unlikely to die down anytime soon and we see this as a major threat for Woolworths and Metcash. Coles is bunkering down to restore its former glory. There will be some disappointment in the outlook of insurance and resources, perhaps some modest earnings downgrades, but nothing significant to what the market already expects.
In terms of coal demand, management notes increasing demand from Asian mills in recent months and ongoing supply issues in Australia, which is contrary to recent rumours about Australian minerals shipments being knocked back from Asian customers. Japanese demand is key.