Coles Shares the Spoils of a Brave New Digital World with Ocado. FVE Unchanged at AUD 12.30

The partnership with online grocery sales specialist and service provider Ocado provides no-moat-rated Coles access to state-of-the-art end-to-end online technology and increases the pressure on Woolworths. However, Coles gives up some of its future online channel earnings in return and we surmise it must also deliver on growth and market share targets to remain Ocado’s exclusive partner in Australia. We expect any material operating margin improvements to be passed on to consumers to compete with peer Woolworths, but also the discounting channel, including Aldi. We maintain our AUD 12.30 fair value estimate on Coles and shares offer little margin of safety at current prices.