Coles Worth Nearly 1% Of ASX Indices: Morgan Stanley

Supreme Court of Western Australia today approved the Wesfarmers Demerger of Coles that marks the final milestone achieved in the spin-off.

The Coles is slated to commence trading on Australian Securities Exchange on 21 November 2018. However, the long-awaited demerger of supermarket giant Coles from Wesfarmers is expected to be implemented later on Wednesday, 28 November 2018.Â

Morgan Stanley told Coles is expected to form part of Australian sharemarket indices following its first day trade on Wednesday. The spin-off could result into the Coles forming nearly 1% of the ASX’s benchmark indices, said Morgan Stanley's strategists.

The retail analyst of Morgan Stanley calculated the share valuation range, the midpoint of which is $11.09 per Coles share. Using this share valuation, the free float market capitalization of Coles is estimated to be around $12.6 billion said Morgan Stanley. The substantial size of the company would make it sit in the Australian sharemarket indices but the important thing to note is in which indices the company will retain its position at the upcoming December rebalance.

Since expected market capitalization of $12.57 billion ranks to the bottom ends of S&P/ASX 20 index, Morgan Stanley estimates that Coles may fall short of maintaining its position within the S&P/ASX.

The separation of Coles from Wesfarmers received Shareholders’ approval at the General meeting and Scheme Meeting held on 15 November 2018. On demerger, Wesfarmers retains 15% ownership in Coles with which it has secured one chair in the Coles’ Board. Further, Wesfarmers owns 50% interest in the flybuys joint venture with Coles.

Moreover, Wesfarmers has announced that dividend policy of the company will remain unchanged following the demerger. The company said that dividend to be declared by both the companies, Coles and Wesfarmers, together would be equivalent to the dividend that shareholders would have entitled to receive otherwise from Wesfarmers if the demerger would not have gone through.

Coles Managing Director Steven Cain stated that Coles, as an independent listed company, will remain focused to improve its market position by constantly improving the customer’s experience. He added Coles will move ahead with its ‘Fresh Tomorrow’ strategy to enhance its food offer and adopt ‘Everyday Low Price’ initiative.

To support net debt of approximately $2.0 billion at demerger, Coles has secured committed bank facilities of approximately $4.0 billion. Although Coles’ dividend policy will be determined by Coles Board, it currently intends to deliver a dividend payout ratio within the range of 80 per cent and 90 per cent.

Further’ in the recent market release Wesfarmers announced that Coles has inked an agreement with German Group Witron to build two new automated supply centres for Coles over a term of five years. That means Coles will have robots as its warehouse staffs.

In today’s trading session, Wesfarmers’ share price declined by 1.194% or $0.530 to last trade at $43.860 on 19 November 2018. On the same date, the stock traded at a PE of 41.940 x with market capitalization of $50.33 billion. Wesfarmers Limited’s stock (ASX: ASX: WES) has witnessed a performance change of +4.32% over the past one year.

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