Woolworths Limited (WOW.ASX) is a company that does not currently meet our shariah investment parameters given it carries on non-compliant business activities.  However, based on recent company announcements and stated intention to demerge these activities over the next 12 months, it could start to qualify for consideration in the portfolio.

Woolworths is an iconic household Australian brand that many millions of Australians shop at for their daily grocery needs through their over a thousand national chain of supermarket stores.  Along with Coles, it dominates the Australian grocery market with approximately 40% market share.  While Woolworths generates approximately 75% of its earnings from supermarkets, it also owns and operates several other retail businesses including Big W, the discount department store retailer, and Endeavour Drinks. Endeavour Drinks represents approximately 25% of earnings and owns a number of liquor outlets including Dan Murphy, BWS and the ALH group that owns pubs and hotels.

Given Woolworths generates a material amount of earnings from the sale of alcohol and gaming through its Endeavour Drinks and hotels business, it is not a compliant shariah investment and is excluded as a permissible investment. However, our engagement with  SG Hiscock and other fund managers along with a growing focus on Environmental, Social and Governance (ESG) issues in recent years has created the impetus to see management and the Board proactively look to embrace change, and provide an opportunity to own one of Australia’s, and arguably the world’s, best supermarket retailers independent of its liquor and gaming activities, hence the board recently decided to de-merge these businesses.

The Endeavour Group demerger was originally planned for the second half of 2020 but given COVID 19 restrictions on the pubs and hotels, the demerger has been pushed out to second half of 2021.  We believe the demerger is highly likely to occur given the amount of time, money and effort that has gone into separating the businesses, however, the timing remains uncertain as management would like 6 months of uninterrupted business trading before the asset sale which is dependent on further virus outbreaks.

We are excited by the prospects of adding another quality defensive business to our investment opportunity set and continue to actively monitor the company’s developments, and potential to consider including Woolworth’s in the portfolio in the future.

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