At the current Woolworths Group Ltd (ASX: WOW) share price, is it an attractive buy as a defensive ASX share?
Over the last month the Woolworths share price has risen by around 5.5%. It hasn't moved much over the last 12 months, but its sales and earnings have been marching higher.
Recent FY21 half-year result
In the first half of its FY21, Woolworths saw continuing double digit growth.
Group sales went up 10.6% to $35.8 billion, with e-commerce sales increasing 78% to $2.94 billion. Online sales made up 8.2% of total sales, up from 5.1% in the first half of FY20.
The business saw group earnings before interest and tax (EBIT) grow by a similar rate, increasing by 10.5%.
However, group net profit after tax (NPAT) increased by 15.9% to $1.1 billion. Woolworths said that its operations continues to be impacted by COVID-19, with elevated sales and higher costs as the company worked to maintain a COVID-19-safe environment.
Looking at Woolworths' different divisions, there was growth across most of them over the first six months of FY21. Australian food sales rose 10.6%, New Zealand food sales increased 2.9%, Big W sales went up 20.1% to $2.58 billion and Endeavour Drinks (including Dan Murphy's) sales rose 19% to $5.68 billion. Hotels was the sales decline by 27.5% to $667 million.
EBIT growth was at a similar pace for most divisions, but Big W EBIT grew 165.7% to $133 million and hotels EBIT fell 45.4% to $122 million. Big W saw such a big EBIT increase because of strong sales growth, gross profit margin improvements and cost control, despite higher COVID-19-related costs. It also saw online sales increase by 120%.
The defensive ASX share pointed out that whilst sales slowed during the half – second quarter sales increased by 8.3% – it was still high single digits.
Woolworths has managed to keep growing, despite all of the disruptions it has faced since early 2020.
Outlook
The Woolworths share price is driven by profit and growth expectations.
In the first seven weeks of the second half of FY21, it has seen continuing strong sales growth, benefiting from continued at-home consumption, Australians not travelling abroad, and a weaker prior year where sales were impacted by bushfires on the east coast of Australia. However, growth rates have continued to moderate over the period in line with the overall market. COVID-19 costs are also coming down as restrictions ease.
Australian food total sales increased by approximately 8% in the first seven weeks.
The medium-term annual net target for Woolworths is 10 to 20 new full range supermarkets in Australia, with five to 15 Metro food stores.
Looking at the Endeavour Group, Woolworths is expecting to separate this business in June 2021, most likely through a demerger.
Woolworths said the divestment will lead to a simplified business, with a greater focus on its core food and everyday needs businesses and allow Endeavour to accelerate its own growth aspirations.
Is the Woolworths share price a buy?
The broker UBS rates the Woolworths share price as a buy with a price target of $44. It likes the possible shareholder returns that may be paid after the divestment of Endeavour – it thinks it still has long-term growth potential.
According to UBS, the Woolworths share price is valued at 27x FY21's estimated earnings.
