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Wesfarmers

Alex Lu

The result overall was broadly in line with our expectations

1H18 underlying EBIT fell 3% to A$2,350m (+2% vs Morgans), while underlying NPAT also decreased 3% to A$1,535m (in line with Morgans). Group underlying EBIT margin fell 50bps to 6.5%. The result reflected a 14% decline in earnings at Coles and losses at Bunnings UK & Ireland (-A$165m as previously flagged) but was partially offset by continued strong growth at Bunnings ANZ (EBIT +12%), Officeworks (+10%) and Industrials (+19%).

The balance sheet remains strong with the fixed charges ratio at 3.0x (1H17: 2.7x) and interest cover at 28.8x (1H17: 18.9x). Return on equity (excl. significant items) increased 180bp to 12.0% while operating cash flow was up 9% to A$2.9m. 1H18 dividend per share of 103cps was lower than our forecast (110cps). 

Coles was better than we expected

Despite a tough operating environment (and with sales momentum clearly with Woolworths at the moment), Coles (F&L) delivered 0.9% like-for-like sales growth which was slightly better than our forecast of 0.5% growth. Overall sales were broadly flat but the annualisation of price investment in FY17, lower property earnings, lower financial services and lower fuel earnings drove EBIT down 14% to A$790m. Despite the drop in earnings, the results was 5% above our forecast.

The result was encouraging in our view, with management expecting the sales momentum achieved in 2Q18 to continue into 2H18 with modestly improved earnings. Overall we expect Coles' 2H18 EBIT to be up 3% on the back of an acceleration in LFL sales growth to 1.6%.

Minor changes to earnings forecasts

Given the 1H18 result was broadly in line with our expectations, we make only minor changes to earnings forecasts. FY18F EBIT remains broadly unchanged at A$4,172m while underlying NPAT falls slightly (1%) to A$2,730m.

Investment view

Despite minimal changes to earnings forecasts our SOTP-based share price target has been increased. This increase primarily reflects peer group multiples, which have risen slightly since our last note. We view Wesfarmers as a core portfolio holding, but we view the stock as fully valued given the earnings concerns around Coles, Target and Bunnings UK and Ireland which is offsetting the positive momentum in other businesses (Bunnings ANZ, Kmart and Officeworks).

We retain our Hold recommendation.

More information

Morgans clients can login to view our detailed report and share price target for Wesfarmers (WES). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.