The Coles Group Ltd (ASX: COL) share price is on course to end the week in the red.
In afternoon trade, the supermarket giant's shares are down 1% to $16.50.
This appears to have been driven by broad market weakness after a very poor night of trade on Wall Street.
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Where next for the Coles share price?
The team at Morgans is likely to see the weakness in the Coles share price as a buying opportunity for investors.
Last week, the broker responded to news that Coles is selling its Express business by retaining its add rating and $20.00 price target on its shares.
Based on the current Coles share price, this implies potential upside of 21% for investors over the next 12 months.
In addition, Morgans is expecting a fully franked 3.9% dividend yield from its shares in FY 2023. Adding this into the equation, the total potential return increases to approximately 25%.
What did the broker say?
Morgans is supportive of the agreement to sell the Express business to Viva Energy Group Ltd (ASX: VEA). It said:
COL has agreed to sell its Express business to Viva Energy (VEA) for $300m. We estimate the deal represents an FY23F EV/EBIT multiple of 4.5x. While low compared to VEA's current Bloomberg consensus FY23F EV/EBIT multiple of 9.1x and Ampol (ALD) at 10.1x, the cash proceeds and transfer of $816m of lease liabilities to VEA on completion of the deal will free up significant balance sheet capacity for COL to focus on its core Supermarkets and Liquor businesses.
The broker thinks focusing on its core Supermarkets and Liquor businesses is that right thing to do. It explained:
[W}e think [this] is the right strategy as competition is likely to remain intense on the back of higher inflation, rising interest rates and increasing cost-of-living pressures for customers. Express only represented 2% of group EBIT in FY22 and generates the lowest return on capital in the group. Funds can therefore be better utilised through incremental investments in supermarkets, liquor and omni-channel.
In light of this, the broker remains positive on the company and feels the Coles share price is trading at an attractive level. Particularly in the current economic environment. Morgans concludes:
Trading on 21.0x FY23F PE and 3.9% yield 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.
