Why is the Woolworths share price holding up?
The US market has experienced a defensive rotation into sectors including utilities and consumer stables while technology, communication services and consumer cyclicals are heavily sold down. A similar scenario looks to be playing out on the ASX today, with the S&P/ASX Consumer Staples (INDEXASX: XSJ) up 0.52%, in stark contrast to the S&P/ASX Information Technology (INDEXASX: XIJ) down 4.25%.
Two announcements have also bolstered the supermarket giant’s shares. A demerger update and news from the Australian Competition and Consumer Commission (ACCC) regarding its proposed acquisition of foodservice supplier, PFD Food Services.
Bullish broker notes on demerger
Brokers have provided notes regarding yesterday’s update on Woolworth’s demerger plans with the Endeavour Group to create two independent and ASX-listed companies.
Macquarie noted that Woolworths would maintain an ongoing partnership with Endeavour and retain a 14.6% shareholding. The broker notes that Woolworths will have a positive net cash position of $75 million post demerger, while approximately $1.4 billion to $1.5 billion of net debt will sit with the Endeavour Group business.
With an improved balance sheet, the broker believes Woolworths will explore capital management options and may return up to $1.6 billion to $2.0 billion to shareholders. With that in mind, Macquarie retained an outperform rating with a target price of $44.50.
Similarly, Morgan Stanley highlighted the plans for potential capital management. Its earnings estimates for the company remain unchanged, retaining its overweight rating with a $44.00 target price.
Credit Suisse was the only broker note to retain a neutral rating. According to the broker, there weren’t many surprises in the demerger.
Credit Suisse views the potential return of $1.6 billion to $2.0 billion in surplus cash post demerger to be within investor expectations. Post demerger, the broker notes that Woolworths will be debt-free and is proposing capital management with its surplus cash position. A target price of $38.05 was maintained.