Here’s why Morgans is tipping the scales more than 20% for Coles stock price

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The Coles Group Ltd. (ASX: COL) the stock price is on track to end the week in the red.

In afternoon trade, shares of the supermarket giant are down 1% at $16.50.

This appears to have been driven by widespread market weakness after a very poor night of trading on Wall Street.

What’s next for the Coles stock price?

The Morgans team is likely to see Coles’ share price weakness as a buying opportunity for investors.

Last week, the broker responded to news that Coles was selling its Express business retaining its addition rating and $20.00 price target on its shares.

Based on the current Coles share price, this implies a 21% upside potential for investors over the next 12 months.

Additionally, Morgans expects an all-outright dividend yield of 3.9% from its stock in fiscal 2023. Adding that to the equation, the total potential return increases to around 25%.

What did the broker say?

Morgans backs agreement to sell Express business to Viva Energy Group Ltd (ASX: VEA). It said:

COL has agreed to sell its Express business to Viva Energy (VEA) for $300 million. We estimate the deal represents an FY23F EV/EBIT multiple of 4.5x. Although low compared to the current Bloomberg consensus EV/EBIT multiple of VEA for FY23F of 9.1x and Ampol (ALD) at 10.1x, the cash proceeds and transfer of $816 million of The lease obligations to VEA upon completion of the deal will free up significant balance sheet capacity for COL to focus on its core supermarket and liquor businesses.

The broker believes focusing on its core supermarket and liquor businesses is the right thing to do. He explained:

[W}e think [this] is the right strategy as competition is expected to remain intense due to rising inflation, rising interest rates and growing cost of living pressures for customers. Express represented only 2% of the group’s EBIT in FY22 and generates the lowest return on capital of the group. The funds can therefore be put to better use through additional investments in supermarkets, spirits and omnichannel.

In light of this, the broker remains positive on the company and believes the Coles stock price is trading at an attractive level. Especially in the current economic climate. Morgan concludes:

Trading on a PE of 21.0x FY23F and a yield of 3.9%, we continue to see COL as offering good value, with the company possessing defensive characteristics that should hold up relatively well in a weaker economic environment.

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