Coles Group Ltd (ASX: COL) shares were on form again on Thursday.
In response to the release of a strong half year result, the supermarket giant's shares raced to a record high.
Unfortunately, one leading broker believes that this could be the peak for the company's shares and has hit the downgrade button today.
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What is the broker saying?
According to a note out of Bell Potter, its analysts were pleased with Coles' half year results, highlighting that its profits were a touch ahead of its estimates. The broker said:
COL reported a 1H25 underlying NPAT modestly ahead of our expectations at $576m (BPe $573m). Revenue of $23,035m was up +4% YOY (vs. BPe $22,938m). EBITDA of $2,045m was up +10% YOY (vs. BPe of $1,996m and VA $1,972m). Underlying NPAT of $601m was up +1% YOY (vs. BPe of $598m and VA $574m).
Headline NPAT of $576m includes $25m in after tax provisions relating to future site closure around the investments in supply chain (vs. BPe of $573m and VA of $558m). Underlying results absorbed $92m in supply chain implementation and duplication costs and gained an estimated $20m EBIT from VIC WOW industrial action
Bell Potter also highlights that Coles is outperforming rival Woolworths Group Ltd (ASX: WOW) early in the second half despite cycling stronger growth rates a year ago. It adds:
Key outlook comments included: (1) Supermarket sales growth through first 7wks was +3.4% YOY (WOW at +3.3%) with COL cycling +5.0% in the pcp (vs. WOW at +1.5%); and (2) liquor sales growth through first 7wks was +3.8% YOY.
Coles shares downgraded
Despite its strong performance, the broker believes that Coles shares are now fully valued.
The note reveals that Bell Potter has downgraded the supermarket giant's shares to a hold rating (from buy) with an improved price target of $21.15 (from $20.50).
Based on its current share price of $20.38, this implies only modest potential upside of 3.8% for investors over the next 12 months.
And even including its forecast 3.4% dividend yield, the total potential return only comes to 7.2%.
Commenting on its downgrade, the broker said:
We downgrade from Buy to Hold. The move reflects the recent share price movement, while being cognisant that the ACCC is likely to release its Supermarkets inquiry final report shortly. We would continue to favour COL over WOW, given what we perceive as better execution against profit growth in a difficult retail environment.
