Morgan Stanley - 1st impression of results

As usual, MS are first to get their initial thoughts out. To be fair the TP of A$17 seems low and I would not expect them to adjust this until after the analyst conference call with management - so that could change

1st Take: Liquor Margin Disappoints, Food Performance Improving

FY16 results have something for the bulls - improving Food LFL sales growth, and for the bears - lower than expected Liquor margins and profit growth. We still think the FY17 consensus is too high as it assumes that Food margins have rebased.

AusFood improvingLFLtrend:LFLsales growth improved from -1.3% (Easter adj) in 3Q16 to -1.1% for 4Q16, we believe an easier year over year comparison has helped, but it also appears Woolworths' price and service investment is gaining some traction. Customer satisfaction, transaction growth and item growth has all improved during the 4Q16.LFLFood LFLsales for the 8 weeks ended Aug 21st increased by 0.3% - which implies a sharp improvement, but is in line with our 1Q17 est for 0.0%. Implied FY16 Food EBIT margins are 4.77% down from 8.25% in FY15 so now not far from Coles implied FY16 Food EBIT margin of 5.5%.

Liquor is the disappointment:First time disclosure of Woolworths Liquor business indicates weak FY16 performance, sales +4.7%, EBIT +3% and lower EBIT margins than expected, 6.4% vs MSe 7.4%. Hence we think the multiple investors ascribe to liquor is lower than previously expected.Lower liquor margins also suggests less of a rebase in Food margins

Hotels, NZ supermarkets missexpectations badly: Hotels EBIT -11% and NZ Supermarkets -6.2% missed our expectations by 8.6% and 7.4%, respectively. NZ supermarkets LFLsales growth continues to slow (4Q16 +0.3%). Hotels profitability was impacted by weak sales growth +2.5%,adverse mix to low margin categories and higher costs following the sale and lease back.

FY17 outlook: WOW won't provide full year profit guidance. It expects the market to remain competitive and continues to see progress on the turnaround

WOW.AX We derive our price target of A$17 from a one-year forward DCFvaluation,assuming a WACC of 8% and a terminal growth rate of 3.0%.