Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Thematic (Sector/Industry)

The Australian grocery industry continues to evolve and everyday dry groceries are likely to become even more commoditised. Aldi re-established the discount channel in Australia and is forecast to ultimately capture close to 10% market share. On this premise, we have re-examined our assumptions on market share and profitability for the Australian supermarket sector and conclude EBIT margins are expected to tighten further. Price competition has heated up as the two dominating players, <a href="https://www.smartkarma.com/entities/500" target="_blank" data-smartkarma-citation="entities:500:1">Woolworths Ltd (WOW AU)</a> and Coles, expand their everyday low price lines to preserve market share. The price cutting has resulted in food price deflation and tightening of operating margins, especially at Woolworths. Coles plans to pass on efficiency gains to consumers by ongoing price cutting, and we expect Woolworths to follow suit, effectively capping operating margins of their supermarket businesses at sustainable levels of 4%. <a href="https://www.smartkarma.com/entities/14632" target="_blank" data-smartkarma-citation="entities:14632:1">Metcash Ltd (MTS AU)</a> network of independent retailers is exposed to the same dynamics, and is continuing with its Price Match programme. However, IGA stores are less able to compete on price than their integrated competition and we expect the network to continue losing a disproportionately high amount of share. On top of the near-term challenges, we identify two conceivable longer-term threats. The potential entry of discounter Lidl or online grocer AmazonFresh, or both, would introduce further pricing tension and increase pressure on margins even more.These key changes lowered <a href="https://www.smartkarma.com/entities/500" target="_blank" data-smartkarma-citation="entities:500:1">Woolworths Ltd (WOW AU)</a>' fair value estimate to AUD 22 from AUD 28. We reduced <a href="https://www.smartkarma.com/entities/1104" target="_blank" data-smartkarma-citation="entities:1104:1">Wesfarmers Ltd (WES AU)</a> fair value estimate to AUD 39.00 per share from AUD 42.00, predominantly due to lower margin estimates. For <a href="https://www.smartkarma.com/entities/14632" target="_blank" data-smartkarma-citation="entities:14632:1">Metcash Ltd (MTS AU)</a>, we have materially increased our fair value estimate to AUD 1.80 from AUD 1.10 due to a much-improved outlook on IGA's market shareAnalyst: Johannes Faul, CFA

Australia

Tomizone Limited provides turnkey wi-fi hotspot and metro wi-fi zone solutions. The Company  offers accommodation, hospitality, airports, transport, retail, and metro wi-fi installations.

Tomizone Ltd - TOM AU

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