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Kalkine Daily 26/02/2015 + Wesfarmers

Mar 07, 2015

| Read Time :10 Mins

In today’s daily we have covered stock research on Wesfarmers (SELL).

The S&P 500 was down by 2.32 points or 0.11% on Wednesday and closed at 2114.67 points. U.S. stocks were slightly higher in early afternoon trading on Wednesday, boosted by gains in consumer discretionary shares and upbeat housing data. The S&P 500 consumer discretionary index up 0.8 percent, gave the benchmark index its biggest lift.Target rose 0.4 percent to $77.28 after a stronger-than-expected jump in same-store sales and profits for the fourth quarter.

Federal Reserve Chair Janet Yellen's testimony to a House of Representatives committee provided few clues for investors on the timing of an interest rate hike. Single-family home sales in January fell less than expected and supply rose to its highest level since 2010.Hewlett-Packard shares tumbled 9.4 percent to $34.88 as the worst performer on the S&P 500 after the world's No. 2 PC maker reported flat or lower quarterly revenue in all of its operating units and forecast full-year earnings well below analysts' expectations.

Target Daily Chart (Source – Thomson Reuters)

S&P ASX 200 was up by 17.9 points or 0.3% on Wednesday and closed at 5944.9 points. Telstra finished the day down 2 per cent at $6.46, while Woodside fell 4.2 per cent to $34.91. The falls were balanced out by strong gains from BHP, which rose 1.3 per cent to $33.50, and QBE Insurance which added 4.8 per cent to $13.05. Among the banks, National Australia Bank and ANZ Banking Group etched out gains, up 0.5 per cent to $37.78 and 0.1 per cent to $35.31, respectively. Westpac Banking Corp slipped 0.2 per cent to $37.88 andCommonwealth Bank of Australia lost 0.2 per cent to $90.87.

Seven Group Holdings, which is invested in media, industrial services and mining reported a half-year profit which fell 74 per cent to $69.2 million. Underlying net profit slipped by just 10 per cent to $118.7 million. However, Seven's shares rose 10.8 per cent to $6.85 after the company announced a new share buyback. Xero shares rocketed 27.8 per cent to $22.60 after the online accounting software maker received a $NZ132.9 million investment from Accel Partners, which is based in Silicon Valley.

Seven Group Holdings Daily Chart (Source – Thomson Reuters)

Top Performers on the ASX 200 were :-

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Stock Of the Day - Wesfarmers (SELL)

Wesfarmers (WES) released its 1H15 result sometime back which has been found to be more or less in line with market expectations. NPAT was found to be up 8.3% to $1.376bn. Cash generation was noted to be strong with operating cash conversion of 117%. The Company reported the free cash flow of $1.3bn in 1H15 which entails a $250mn payables timing benefit. Net debt was reported to be $5.1bn. WES can maintain a circa 100% payout ratio in the absence of any acquisition activity.

Group Performance (Source – Company Reports)

Retail businesses appeared to yield solid results. WES is able to illustrate solid profit growth from Coles, Home Improvement and Kmart. A marginal slowing in the rate of growth at Coles was seen. There were not many signs of increasing competition for Coles with EBIT up 8.7% on 5.3% sales growth for 1H15. A marginal slump in like-for-like (LFL) sales growth from 4.3% in 1Q to 4.0% in 2Q was seen. Bunnings remained strong in view of sales but was below par given margin decline. Home Improvement witnessed EBIT increase of 10% on reported LFL sales growth of 9%. This was steered by ramp-up of newly opened stores. Home Improvement has the focus on pursuing volume in the coming years. A good performance was also delivered by Officeworks with EBIT 19%. There was a decline of $50mn in Chemicals earnings for FY15 owing to higher gas costs and diversion of excess ammonium nitrate (AN) production to export and fertiliser. Primarily, an over-supply situation exists with imports from Bontang and WES’ own AN-3 plant development. Resources witnessed solid performance with regards to costs while maintaining profit contribution from the division. Unit mine costs dipped 6% on previous corresponding period. Industrial and Safety reported a 30% waning in EBIT.

Segment-wise EBIT Results (Source – Company Reports)

WES’ outlook entails good performance by Coles and Home Improvement. There do appear certain risks to sales and EBIT growth in the medium term while WES is trying to set-out strategies to mitigate competition. Store and range expansion are favorable to Home Improvement. Mid-single digit EBIT growth is supported by EBIT growth from Coles and Home Improvement.

Shareholder Distributions (Source – Company Reports)

Risks also emanate from retail divisions centre on Kmart and Target. Low sourcing benefits and surge in cost of goods are anticipated to result in an EBIT dip from Kmart over the medium term. WES expects to have profit recovery from Target although. Various discontinuities are seen in industrial sectors.

Home Improvement Highlights (Source – Company Reports)

WES now looks little expensive in view of trading on a 2014-15 price-earnings multiple of about 20-21 against anticipated three-year compound annual earnings per share growth of 8%. This looks to be fully priced at this moment. Uncertainty also hovers around the price war by Coles with players such as Woolworths as the Company is ready to cut prices and sacrifice short-term growth with an intention to drive long-term growth.

Wesfarmers Daily Chart (Source - Thomson Reuters)

Accordingly, we put a SELL recommendation for this stock at the current price of $45.60.

Team Kalkine

Level 13 167 Macquarie Street
Sydney NSW 2000 Australia
E-Mail - [email protected]
Phone - 02 8667 3147

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