Tuesday, February 13, 2007

Coles still a takeover target

Analysts from Investment banks are convinced that a further takeover proposal for Coles Group Limited (ASX:CGJ) will be forthcoming.

The retail group's management is adamant it will maintain an integrated company with stores rebranded to Coles, but many investors are hungry for a split of assets. Such a sale could attract up to $20 billion, with the supermarket section itself worth $A13 billion.

Coles is due to release its half-year profit figures in March and there is speculation that this may be the trigger for takeover movement. The recent takeover bid was $15.25 per share and even then the board's position was that it undervalued the company. Since the takeover rejection the Coles share price has slowly risen to $14.70.

As far as valuing the company, it is currently sitting on a PE of 23 with a PEG ratio of 2.28. These are fairly high but are lower than its major competitor Woolworths Limited (ASX:WOW) which sits on a PE of 26. Analysts expect Woolworths to make a gain of 30% on its EPS in the next two years while they are expecting Coles Group to make a gain of 31%. Based on these figures you have to think that Coles is slightly underpriced to its major competitor but is still overpriced based on conventional fundamental techniques.

I suspect analysts are expecting Coles and Woolworths to continue to make profits from the alcohol and petrol stores. They may also be gaining a slight market share from some independent grocers. They could also expect that the companies might get into the pharmacy business which could offer a large growth area. Inflation might also add 4%-5% to the EPS but truthfully I think these estimates are too high. Yes Coles and Woolworths are good companies but you need to get them at a much lower PE ratio if you expect to make a good gain ( double figures in percentage points) you need to get them at a reasonable price.

Good Luck Investing.

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