Wesfarmers: Rolling with the punches

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
30 August 2021, 11:00 AM
Sectors Covered:
Industrials

  • WES’s FY21 result was slightly above our expectations but a bit below Bloomberg consensus at the underlying EBIT line.  
  • Key positives: WES has proposed a A$2.3bn (A$2.00 per share) capital return that is expected to be paid in December (subject to shareholder approval); Group EBIT margin rose 100bp to 10.5%; Kmart Group EBIT jumped 69%. 
  • Key negatives: Operating cash flow fell 26%; Recent lockdowns have affected the retail businesses with trading restrictions and several store closures. 
  • FY22 YTD performance (first 7 weeks): Bunnings sales -4.7%; Kmart and Target sales -14.3% (first 8 weeks); Catch GTV -8.5%; Officeworks sales -1.5%.  
  • We  decrease  FY22F  underlying  EBIT  by  9%  to  A$3,196m  after  taking  into consideration the impact of recent lockdowns. Our FY23 and FY24 EBIT forecasts rise slightly (+1%) as we expect conditions to normalise by then. Our target price increases to (login to view) and we maintain our Hold rating.

FY21 result was slightly above our expectations 

In our view, WES delivered a good FY21 result with underlying EBIT up 21% to A$3,550m (+2% vs MorgansF and -3% vs Bloomberg consensus) and underlying NPAT  rising  16%  to  A$2,421m  (+2%  vs  MorgansF  and  +1%  vs  Bloomberg consensus). All divisions except for WesCEF delivered earnings growth with Kmart Group (EBIT +69%) and Bunnings (+20%) the standouts. 

A  key  highlight  was  the  proposed A$2.3bn  (A$2.00  per  share)  capital  return, reflecting the strength of the balance sheet with FY21 net cash (ex-leases) of A$109m. The distribution is subject to shareholder approval at WES’s AGM in October and if approved, is expected to be paid in early December. 

Kmart Group and Bunnings performed well

Kmart Group delivered strong EBIT growth of 69% (+4% vs MorgansF) driven by higher sales in the home, active and kids categories, partially offset by lower demand for some apparel products. The Target restructuring program continued with 86 Target stores converted to Kmart stores while 58 target stores were closed. Pleasingly, management  said the conversion program has so far exceeded expectations. Kmart Group EBIT margin rose 240bp to 6.9%. 

Bunnings continues to perform well with EBIT up 20% (in line with MorgansF) on the back of ongoing demand for home improvement. All major regions and product categories delivered higher sales, with growth in outdoor living particularly strong. 

Officeworks EBIT rose 8% (-1% vs MorgansF), benefitting from customers working and learning from home as well as ongoing improvements to the product range. Earnings however fell 3% in 2H21 as the business cycled 26% growth in the pcp.

Near term outlook is uncertain

WES advised that its retail divisions have been affected by recent lockdowns with trading restrictions and several store closures.  For the first 7 weeks of FY22, Bunnings sales were down 4.7%, Kmart and Target (first 8 weeks) sales were 14.3% lower, Catch GTV was down 8.5% and Officeworks sales fell 1.5%. Given the impact of lockdowns in recent months and the prospect of continued trading restrictions, management said earnings in WES’s retail businesses during 1H22 may be below the pcp.

Changes to earnings forecasts

On the back of the disruptive current trading conditions we have decreased FY22F underlying EBIT by 9% but raise our FY23 and FY24 forecasts slightly (+1%) as we believe demand will rebound once retail stores can reopen. Our FY22 forecasts also factor in extra opex of up to A$100m flagged by management to accelerate the  development  of  the  group’s  data  and  digital  ecosystem.  WES  expects  to provide more details on these initiatives at the 1H22 result.

Investment view

Despite downgrades to near-term earnings forecasts our equally-blended (PE, SOTP, DCF) target price rises to (login to view) as we believe WES’s underlying businesses remain strong with a healthy balance sheet supporting opportunities for further organic and inorganic growth. With a 12-month forecast TSR of -3% we maintain our Hold rating

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