The Coles float is good news for Woolworths

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The decision by Wesfarmers to float Coles as a separate ASX-listed company is good news for Woolworths, says Deutsche Bank.

Coles will be better placed to succeed in the long term outside of Wesfarmers. And the new Wesfarmers will offer higher growth and returns, have a strong balance sheet and be better placed for acquisitions.

However, the demerger is also good news for Woolworths, says Deutsche Bank analyst Michael Simotas in a note to clients.

“While we believe Coles may be more successful in the long term outside of WES, in the short-medium term, today’s developments are positive (for Woolworths),” he writes

Wesfarmers last week announced a demerger of Coles to create a new top 30 company listed on the ASX, holding about 34% of Wesfarmers’ earnings, with about $39.2 billion in revenue and EBIT (earnings before interest and tax) of $1.6 billion.

Simotas says the disruption from the management change at Coles and demerger process could enable Woolowrths to extend its sales growth leadership.

“Coles will need to stand on its own two feet, and without the cashflows from Wesfarmers’ other businesses will have far less wherewithal to be aggressive on price,” he writes.

Simotas forecasts a continued earnings decline for Coles in 2018 but for modest growth from the 2019 financial year onwards, about the times the Coles stock would start trading.

“Coles likely to deliver mid single digit earnings growth once it stabilises,” he says.

Here’s his estimate on the growth of Coles:

Deutsche Bank has Wesfarmers as a hold and Woolworths as a buy.

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