Coles or Wesfarmers: What will be the effect of the demerger?

By Dale Gillham. Published at Nov 26, 2018, in Market Wrap

Last week, the Australian share market had a poor start to the week, falling by around 1 per cent, following a fall on overseas markets.

The effect of this fall was felt by many on the ASX, except it seems for Coles Group (ASX:XCOL).

The demerger of COL from Wesfarmers saw the stock opening at $12.49 before trading to a high of $13.37. It closed the day at $12.75. COL is currently trading on a deferred settlement basis, with normal trading to occur from 29 November 2018.

When demergers or new listings occur, some investors attempt to make a quick return by selling the stock when there is heightened interest. Given this, it is not uncommon to see the price break up only to fall away in the days following. It is thus important for investors not to get caught up with these listings. History also dictates that there is more than a 50 per cent probability the stock will be trading below the issue price within the first 12 months.

The problem with demergers is that investors who held shares in the stock prior to it demerging are far less inclined to sell their shares after the demerger. But it is important for investors to understand that the group is demerging for a reason and, in most cases, one stock will benefit while the other will struggle. In this instance, Wesfarmers could benefit much more from the demerger – although it would be wise for investors to wait for Wesfarmers shares to stabilise and start moving up before buying given that it has fallen almost 19 per cent in recent months. That said, Wesfarmers has promising growth prospects including plenty of cash on the balance sheet to pursue acquisitions.

So what do we expect in the market?

Looking at the sectors, Information Technology (XIJ) was hit hardest last week falling around 7 per cent alongside, Energy (XEJ) which was down 4 per cent.

Since October, the Energy sector is down from its high of 12,667 points and has fallen over 20 per cent to a recent low of 9,967 points. Falling oil prices have been the catalyst for the sharp drop with the price of WTI crude oil falling from above $75 a barrel in October to below $55 a barrel this week.

Concerns over global demand and China’s economic slowdown, along with lifts in both the US and Saudi Oil production has seen price slide in recent months. There is a lot of support for Light Sweet Crude Oil around the $51.00 price level, which is a point where I think it will turn to rise.

Financials (XFJ) got a lift this week from the big 4 with CBA, Westpac, ANZ and NAB all up around 2 per cent.

Dale Gillham is Chief Analyst and founder of Wealth Within.

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