Wesfarmers: Trading well despite some disruptions

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Alex Lu
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By Alex Lu
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Date posted:
12 November 2020, 9:59 AM
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  • Westfarmers' (ASX:WES) trading update overall for October YTD was better than we expected.
  • Bunnings (total sales +25.2%) and Officeworks (+23.4%) were particularly strong with Catch also maintaining good momentum (+114.4%).
  • LFL sales at Kmart (+9.4%) and Target (+9.9%) were solid, boosted by very strong online growth, although total sales (Kmart +3.7%, Target -2.2%) were adversely impacted by government-mandated store closures in Melbourne.
  • We increase FY21F group underlying EBIT by 6% to A$3,033m.
  • Our target price rises (login to view updated target price) and we maintain our Hold rating.

Bunnings and Officeworks were the key highlights

Bunnings delivered total sales growth of 25.2%, which was well ahead of our 12.7% forecast for 1H21 driven by continued growth in both consumer and commercial segments. Consumer sales have been particularly strong as customers undertook projects around the home.Officeworks’ total sales was also better than we expected, with growth of 23.4% versus our 12.0% forecast.

Technology and home office furniture demand has been strong. However, margin has been impacted by adverse sales mix with the lockdown in Melbourne disproportionately affecting sales in higher margin categories such as office supplies and print, copy & create.

Kmart Group was adversely impacted by lockdowns

The performance of Kmart (total sales +3.7%) and Target (-2.2%) was broadly in line with our forecasts driven by continued growth in home, active and kids categories, partially offset by lower demand for apparel products.

38 Kmart stores and 32 Target stores were temporarily closed in Melbourne, impacting sales, but this was partially offset by very strong online growth. During the period, 15 Target stores were converted to Kmart stores with management advising that early customer feedback, transaction volumes and sales have been very encouraging with initial results from converted stores exceeding expectations. Catch continues to experience strong growth with sales up 114.4%.

Industrials off to a good start

Management advised that in WesCEF, demand for ammonium nitrate has been resilient while in Industrial & Safety, Blackwoods has benefitted from growth in sales to major customers and strong demand for safety and hygiene products. Demand from oil & gas and general manufacturing however has been weaker. COVID related costs of ~A$23m were incurred during the period with WES expecting costs to run at ~A$15m per quarter while the threat of COVID persists.

Maintain Hold rating

On the back of updates to earnings forecasts our equally-blended (PE, SOTP, DCF) target price rises (login to view updated target price). We continue to see WES as a long-term, core portfolio holding with a diversified set of businesses, strong balance sheet and experienced management team.

However, trading on 27.3x FY21F PE and 3.2% yield we see the current valuation as full. We may look to become more positive on the stock on share price weakness.

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