Coles Group (ASX: COL) — Investment Research Report

3-Year / 5-Year Price Scenarios

Base EPS: $0.76 — TTM EPS A$0.76. PE 31.1x (forward 24.4x) is high for a ~3-4% growth supermarket; beta just 0.30 (very defensive). Core: supermarket-duopoly stable profit vs 31x full-valuation reversion + ACCC pricing scrutiny.

0. Information Richness & AI Limitations

Grade A (abundant). A A$32B second-largest Australian supermarket (a duopoly with Woolworths), ASX top-20, a national consumer-staples leader, very dense broker coverage, beta just 0.30 (very low volatility). Grade-A trap: very strong consensus (quality defensive income stock). The report focuses on the reverse-check: is a ~3-4% growth supermarket worth PE 31 (forward 24)? How much premium does the market pay for 'defensive + duopoly + fully-franked yield'? Two caveats: (1) full PE — 31x (forward 24x) is clearly high for a low-single-digit-growth supermarket; the market gives a 'defensive + certainty + fully-franked high yield' premium (bond-proxy chasing in a low-rate environment), and the stock is near its 52-week high (+26% in a year). (2) real regulatory risk — Australia's ACCC and politicians continue to scrutinize supermarket pricing ('greedflation', supplier squeezing), the #1 non-market risk for the supermarket duopoly.

1. Data & Cross-Validation

Price A$23.79; ~1,340M shares; market cap A$31.88B (hand-calc; a source 31.49B, 1.23% ⚠️); PE(TTM) 31.1x (dear for a supermarket), forward 24.4x; EPS TTM A$0.76; dividend yield 3.12% (fully franked); beta 0.30 (very defensive); 52-week A$20.10–24.59 (near the high); broker target ~A$22.50 (below the price).

Financials (AUD, FY-end Jun 30): FY24 revenue 43.68B → FY25 44.49B (+1.8%); FY25 statutory net profit 1.08B (-3.5%), underlying NPAT 1.2B (+3.1%); TTM revenue 45.08B (+1.3%), net profit 1.01B (-8.2%); operating margin ~4.4% (supermarket thin). Key read: low-single-digit revenue growth (+1.8%), underlying net profit +3.1% but statutory −3.5% (one-off costs from warehouse-automation reconfiguration). A modestly-growing, thin-margin (4.4% operating / ~2.4% net), highly-defensive (beta 0.30) staples business. Growth engines: e-commerce, store investment, warehouse automation (Witron) efficiency.

Segments: Supermarkets (core ~90%+, duopoly with Woolworths, essential grocery, rigid demand); Liquor (Liquorland/First Choice); Express/other (convenience/fuel). Competition: Woolworths (main), Aldi, Amazon, independents.

2. Business Essence — Duan Yongping

One line: Coles is 'the grocery toll booth of Australia' — selling life essentials through a national supermarket network, in a duopoly with Woolworths — a rigid-demand, recurring, highly-defensive, but thin-margin staples business.

Model: retail (supermarkets), recurring, essential, counter-cyclical (people buy groceries in good times and bad). Beta just 0.30 — one of the most defensive businesses around. Duopoly: Coles + Woolworths hold ~65%+ of Australian grocery; scale + supply chain + store network form a wide moat. Thin margin: supermarket net margin ~2.4% (volume, thin, industry norm). Scale + automation (Witron warehouses) is the efficiency path. Limited operating leverage: stores/supply chain are capital-intensive; growth comes from share + categories + efficiency, not high growth.

Duan's verdict: good on rigid demand, counter-cyclical, duopoly moat, 3.1% fully-franked yield, beta 0.30 highly defensive; the concern is thin margins, modest growth, ACCC regulation, and a full PE 31. In one line: a 'top-quality defensive staples-duopoly toll booth, but not a cheap price.'

3. Moat — Buffett

Brand/pricing ★★★☆☆ (national brand, some pricing power, but ACCC/competition-constrained); switching costs ★★☆☆☆ (consumers can switch supermarkets, but convenience/habit sticky); network effects ★★☆☆☆ (store density + supply-chain scale); scale ★★★★★ (duopoly scale + supply chain + purchasing power — the core moat); store/site ★★★★☆ (national prime-site store network, unreplicable).

Trend: the core moat is duopoly scale + supply chain + store network — replicating Coles/Woolworths' national network in Australia needs decades + huge capital, near-impossible for new entrants (except Aldi's slow penetration). The moat is wide and stable; warehouse automation slowly improves the cost advantage. Risk: Aldi's continued penetration, Amazon/online, and ACCC regulation of duopoly pricing power. Buffett question: the duopoly scale and store network likely persist 10 years out (people always eat and buy groceries). What destroys it: forceful ACCC regulation compressing margins, Aldi/Amazon share erosion, or a drastic shift in shopping habits. A Buffett-favoured 'everyone-needs-it, scale-moat' business.

4. Reverse Thinking & Risks — Munger

Historical analogy: global supermarket leaders (Tesco, Kroger, Walmart) — defensive, essential, duopoly/leader, but thin-margin, low-growth, regulation- and competition-constrained. These are 'bond-proxy' defensives — chased when rates are low (valuations rise), pressured on competition/regulation shocks. Coles' current 31x is a high point for the defensive premium — supermarkets rarely stay above 30x for long. Munger question / where I'd be wrong: lured by 'defensive, duopoly, fully-franked dividend, beta 0.30', paying 31x for a ~3% grower, ignoring the signal that even the broker target (A$22.5) is below the price. Why smart investors don't chase: supermarkets aren't worth 30x; valuation-reversion risk is large; ACCC is a sword overhead. Bulls bet on a sustained defensive premium + automation efficiency.

5. Management — Duan Yongping + Buffett

Strategy execution: management advances warehouse automation (Witron), e-commerce, and store investment, using efficiency to offset thin margins + inflation — the right direction. FY25 underlying net profit +3.1%. Capital allocation: steady fully-franked dividends (~2x cover), prudent capex (automation), a solid balance sheet (cash reserves) — income-friendly. Alignment: clear payout policy, defensive and steady. Risk: management can't change the supermarket's low-growth nature; navigating ACCC regulation and automation-investment returns are key tests.

Duan question: if the CEO retired, would it stay competitive? — Yes. The moat comes from duopoly scale + store network + supply chain (institutional assets), not an individual — a consumer-staples infrastructure 'a fool could run,' where management need only hold share and control costs.

6. Industry & Civilizational Trend — Li Lu

Not a paradigm shift — grocery is an eternal, mature, defensive staple. No tech revolution. Its certainty comes from 'people always eat,' not a growth curve. TAM trend: the Australian grocery market is mature (grows modestly with population + inflation, low single digits). A clear ceiling but very stable. Value-chain position: the retail endpoint of the food supply chain — directly reaching consumers, but squeezed between suppliers and consumers, thin margin. Tech risk: e-commerce/online grocery and warehouse automation are efficiency variables (both opportunity and capital need); Amazon etc. are long-term competition. Li Lu question ('Standard Oil or 3Com in 20 years?'): more the 'water and electricity of staples' — in 20 years very likely still one of Australia's duopoly, still selling groceries and paying dividends. Won't change the world, but perpetual, defensive, essential. Like TLC/CPU/TLS, a 'ballast' infrastructure — limited growth but very stable. Li Lu would acknowledge the moat and defensiveness but stress 'price' — a good defensive asset bought at a dear price delivers mediocre returns.

7. Valuation & Scenarios — Buffett + Duan

PE(TTM) 31.1x / forward 24.4x / 3.12% fully-franked yield / beta 0.30. For a ~3-4% growth, thin-margin supermarket, 31x is clearly dear (supermarket norm 18-22x). The market pays a hefty premium for 'defensive + duopoly + fully-franked high yield + low volatility' (bond-proxy chasing in a low-rate environment), and the stock is near its 52-week high. Reverse read: 31x implies 'the defensive premium is maintained + automation efficiency + share holds.' The broker target A$22.5 is already below the A$23.79 price — the analyst's fundamental valuation has been outrun by the market price. If the valuation reverts to supermarket norms, the price is pressured even as EPS grows.

Three scenarios (base EPS A$0.76, tool-verified):

3-year: Bull 8% growth / 26x → A$24.90 (+5%, 30%); Base 4% / 22x → A$18.80 (−21%, 50%); Bear −2% / 16x → A$11.40 (−52%, 20%). Prob-weighted ≈ A$19.15 (−19.5%). Adding 3.1%×3 ≈ 9% dividends → 3-year total ~−10%. 5-year: Bull 6% / 25x → A$25.40 (+7%, 30%); Base 4% / 21x → A$19.40 (−18%, 50%); Bear 0% / 15x → A$11.40 (−52%, 20%). Prob-weighted ≈ A$19.60 (−17.6%). Adding ~3.1%×5 ≈ 16% dividends → 5-year total ~−2% (0%/yr).

Interpretation (key): on earnings, the probability-weighted price expectation is negative (3yr −19.5%, 5yr −17.6%). The reason: 31x is dear for a 3-4% grower, with large valuation-reversion risk — even a 3.1% fully-franked dividend leaves total return marginally negative. Even the bull (defensive premium maintained) is only +5%+7% because 31x must revert. The broker target A$22.5 below the price directly confirms the price has front-run the defensive premium. A textbook 'top-quality defensive business + a dear price': the moat is flawless, but the current price leaves almost no room for return.

Duan question ('hold 5 years if the market closed?'): yes to holding (wide moat, essential, fully franked), but not to buying heavily at 31x. Duan would say: everyone understands this good business, but buying a 3%-grower supermarket at 31x gives mediocre returns. A good defensive asset still needs a good price — wait for a pullback to the low-20s multiple.

8. Decision Memo

Decision: No position: wait and build in stages — A$19-21 (PE ~20x, yield >3.5%) is a quality defensive's proper price; 31x is dear, don't chase. Holders: hold for income — wide moat + rigid demand + 3.1% fully franked; hold long-term if held, but the valuation is dear — take some profit when overheated (A$24+). Sell signals: major ACCC crackdown / share or gross-margin decline / sharp rate rise de-rates. Add signals: pullback to A$19-21, yield >3.5% / automation efficiency delivers + margin recovery.

One-line conclusion: Australia's supermarket duopoly (with Woolworths), essential defensive, beta 0.30, 3.1% fully-franked yield — a quality ballast — but PE 31 (forward 24) is dear for a 3-4% grower and it's near its 52-week high with the broker target below the price. 3-year neutral A$18.80 (−21%, ~−10% total with dividends); 5-year neutral A$19.40 (−18%, ~−2% total); probability-weighted price negative, even the bull only +5%+7% as 31x reverts. A wonderful defensive business at a full price — buy on a pullback to A$19-21 (~20x), not at the high.

Four-Master Commentary

Buffett: "Everyone buys groceries, a duopoly, a scale moat — this is a business I like, steady and defensive. The only issue is price: 31x for a 3%-grower supermarket, and even the analyst who rates it Buy has a target below the price. A good business still needs a good price — I'd wait for it to fall to the low-20s multiple."

Munger: "Invert it — how does this good supermarket lose me money? Buy at 31x, then the valuation reverts to the 20x a supermarket deserves, and you lose even if profit grows. Plus the ACCC is watching pricing. It's genuinely defensive, but the price has already front-run the defensiveness."

Duan Yongping: "A duopoly, essential, fully-franked dividend — it's a good business I understand. But 31x is too dear. A good defensive asset still needs a good price — I'd be interested at the low-20s multiple with a yield above 3.5%. At this price I'd watch."

Li Lu: "It's the water and electricity of staples — in 20 years still selling groceries and paying dividends, a wide moat. But it won't change the world and growth is limited. Great portfolio ballast — but buy at a reasonable price; a defensive at 31x delivers mediocre returns. Wait for rates or valuation to be right."