Leading broker tips Coles share price to hit $14.10

The Coles Group Ltd (ASX:COL) share price could continue to rise from here according to one leading broker…

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The Coles Group Ltd (ASX: COL) share price was a strong performer on Tuesday following the release of its refreshed strategy at its first investor day event since the demerger from Wesfarmers Ltd (ASX: WES).

The supermarket giant's shares finished the day 3.5% higher at $13.21.

Is it too late to invest?

The good news for investors is that one leading broker believes that Coles' shares can continue their ascent over the next 12 months.

According to a note out of Goldman Sachs, its analysts have held firm with their buy rating and lifted the price target on the company's shares by 6% to $14.10.

This price target implies potential upside of 6.7% for its shares excluding dividends. If you include the 4.5% forward yield that Goldman expects Coles' shares to provide, then this potential return stretches to 11.2%.

Why is Goldman Sachs bullish on Coles?

Goldman was pleased with what it saw yesterday, advising that the: "first Investor Day of Coles as a separately listed organization checked all the boxes of our expectations. Additionally, it also surprised in terms of the lower expected capital expenditure."

The broker was pleased with its smarter selling strategy which aims to deliver $1 billion in cumulative savings by FY 2023.

This is expected to be achieved through initiatives including the use of technology to automate manual tasks and simplifying above-store roles to remove duplication, allowing Coles to offset the impact of rising costs including energy and labour.

Goldman said: "We view the smarter selling strategy as being a positive step towards a more efficient execution of Coles' growth/cost saving strategy. This program will act as a bridge towards the foundation on which the new supply chain including the Ocado and Witron updates will come live and drive further cost reductions over the longer term."

Another big positive was its capital expenditure program, which was far lower than the broker had anticipated.

"While the cost out was broadly anticipated in our numbers, we also anticipated gross capital expenditure to be higher at ~A$1.1bn in FY20 increasing to as much as ~A$1.3bn in FY22. However, the new guidance for FY20 capital expenditure is between A$700-900mn and that in FY21 and FY22 to not exceed A$1bn in a year."

As a result, the broker believes that "the annual FCF will be able to sufficiently meet the annual dividend obligations and gearing metrics should gradually decline."

Overall, the broker continues to see Coles as a better buy than rival Woolworths Group Ltd (ASX: WOW).

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COLESGROUP DEF SET and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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