Company Overview: Wesfarmers Limited (ASX: WES) got listed on ASX on 15th November 1984. WES is an Australian company that provides functions like home improvement and outdoor living, office supplies, industrial division, apparel and general merchandise, with businesses operating in chemicals, energy and fertilizers, and industrial and safety products. WES operates through segments Bunnings; Kmart Group; Officeworks; Chemicals, Energy and Fertilisers (WesCEF); Industrial and Safety (WIS), and Other.
WES Details
Scheme of Arrangement with Australian Pharmaceutical Industries (ASX: API): The Federal Court of Australia approved the scheme of arrangement where API and its wholly owned subsidiary - WFM Investments Pty Ltd, will acquire 100% of API’s shares. The scheme's implementation is expected to be completed on 31st March 2022, where the final cash payment will be $1.50 per share for each API share.
1HFY22 Financials:
- Stability in Top-line: The revenue stood at $ 17,758 million in 1HFY22, ~0.1% down on a pcp basis. Amid COVID-19 uncertainties, the company reflected the strength of the portfolio and teams’ capacity in 1HFY22 to adjust to meet customer demands rapidly.
- Major Chunk Used in COVID-19 Costs: Around $80 million was spent on COVID-19 related expenditures, out of which half was spent on team member payments. Due to its operating model and WesCEF (strong earnings growth), Bunnings reflected pleasing results during the half-year Industrial and Safety also showed rays of improvement. On the other hand, due to restrictions, Kmart Group and Officeworks results got significantly impacted.
- Profitability: Due to the increase in the above-mentioned costs, the company reported its EBIT as $1,905 million, with a decline of ~14.2% in NPAT (excluding significant items) from $1,414 million in 1HFY21 to $1,213 million in 1HFY22.
Key Metrics (Source: Analysis by Kalkine Group)
Top 10 Shareholders: The top ten shareholders together form around 20.13% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc., and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at ~6.00% and ~3.36%, respectively, as also highlighted in the chart below:
Source: Analysis by Kalkine Group
Key Metrics: The company’s cash cycle days have decreased from 18.6 days in FY19 to 13.2 days in FY21. Also, its ROE% increased from 12% in FY17 to 25% in FY21.
ROE & Cash Conversion Cycle Trend (Source: Analysis by Kalkine Group)
Key Risks:
- COVID-19 and Omicron Variant Risks: Due to COVID-19 and the new variant, the company could be affected by the lockdown regulations and restrictions, impacting sales and operations.
- Commodity Price Risks: The business is susceptible to the risk associated with commodity price fluctuations.
- Currency Price Risks: Considering the market volatility, its price is dependent on the external demand and supply of the raw material and it’s sourcing etc.
- Labour Supply: Apart from the above, the business’ operations are also dependent on the labour availability market, and hence the functions might be affected.
Outlook:
- Burnings remain focused on key strategic investments to support long-term growth, and Kmart is also concentrating on delivering the growth by leveraging its product development and scale capabilities, delivering the lowest prices to customers.
- The chemicals, Energy and Fertilizers' segment is expected to benefit from the recommencement of ammonia production in December 2021 and high global ammonia prices.
- In line with the previous guidance, the group’s operating expenditure related to its data and digital ecosystem of ~$100 million is expected during FY22.
- The Group expects net capital expenditure in between ~$900 million to ~$1,100 million for FY22. Moreover, the anticipated API acquisition is yet to be completed around the end of the first quarter of the CY22.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
Stock Recommendation: As per ASX, the stock of WES is trading lower than its 52-weeks’ average levels of $47.445 - $64.976. The stock gave a negative return of ~6.79% in the past six months and ~0.14% in the past one year. The stock has been valued using EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight premium to its peers’ average multiple, owing to the expected capital expenditure in FY22 for future long-term growth initiatives and increasing investmei nts n joint ventures. For the purpose of valuation, few peers like Harvey Norman Holdings Ltd (ASX: HVN), Premier Investments Ltd (ASX: PMV), and City Chic Collective (ASX: CCX) and others have been considered. Considering the stability in revenue, positive margins the company is holding, upside potential in valuation, current trading levels, hopeful long-term outlook, and the key risks associated with the business and current market volatility due to global tensions, we recommend a ‘Buy’ rating on the stock at the closing market price of $50.65, up by ~1.829%, as of 29th March 2022.
Markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
WES Daily Technical Chart, Data Source: REFINITIV
Note 1: The reference data in this report has been partly sourced from REFINITIV
Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.
Technical Indicators Defined: -
Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.
Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.
Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.
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