Wesfarmers: Still going strong

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Alex Lu
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By Alex Lu
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Date posted:
18 February 2021, 4:30 PM
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  • Wesfarmer's (ASX:WES) 1H21 result was well above our expectations.
  • All divisions delivered earnings growth that was ahead of our forecasts with the balance sheet remaining very strong.
  • WES advised that while sales across its retail businesses have remained strong through January and February, a slowdown from March is expected as the businesses begin to cycle the initial impacts of COVID-19 in the prior year.
  • We increase FY21F/FY22F/FY23F underlying EBIT by 15%/11%/11%.
  • Maintain Hold rating on a higher target price (login to view).

1H21 result was much better than we expected

1H21 underlying EBIT rose 27% to A$2,057m (+19% vs Morgans) while underlying NPAT increased 25% to A$1,414m (+21% vs Morgans). The result was driven by strong performances from Bunnings (EBIT +36%) and Officeworks (EBIT +22%) with both businesses benefitting from customers spending more time working, learning and relaxing at home.

Government stimulus also had a positive impact. Kmart Group performance was robust, with EBIT up 42% reflecting higher sales (Kmart LFL +9.1%; Target +13.0%) and lower clearance activity.

Pleasingly, Target profitability improved significantly during the half and trading at the 19 stores that have been converted to Kmart stores has so far exceeded management’s expectations.

While it is still early days, it was good to see the strategy getting off to a positive start. Industrials earnings were mixed with WesCEF EBIT down 8% and Industrial & Safety EBIT up strongly to A$37m (vs A$7m in the pcp).

Outlook was cautiously optimistic

WES said that its retail businesses have maintained strong sales momentum through January and February, with some impact from government-mandated trading restrictions in VIC, WA and NZ. The stay-at-home trend is likely to continue while travel restrictions persist, which will support demand in some of its businesses.

However, management expects retail sales growth to moderate from March as the businesses begin to cycle the initial impacts of COVID-19 in the prior year. Overall, we forecast FY21 group underlying EBIT to be up 18% to A$3,481m.

Balance sheet flexibility

WES’s balance sheet remains very healthy with 1H21 net cash of A$871m. The balance sheet position gives WES plenty of capacity to navigate through the uncertain trading environment, continue to invest in its existing businesses, and pursue potential M&A opportunities.

We believe if COVID-19 uncertainty moderates over the next 6-12 months and M&A opportunities do not arise, then there is potential for capital management. The form of capital management however is likely to depend on the franking credit balance.

We maintain our Hold rating but remain positive longer term

Following upgrades to earnings forecasts our equally-blended (PE, SOTP, DCF) target price rises from A$49.20 (login to view). While we continue to see WES as a long-term, core portfolio holding, trading on 25.6x FY22F PE and 3.4% 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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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.

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