Wesfarmers Ltd

WES Details

Wesfarmers Ltd (ASX: WES) operates in diverse businesses that include home improvement, outdoor living and building materials, general merchandise and apparel, office, and technology products. It is also engaged in the manufacturing and distribution of chemicals and fertilisers, distribution of industrial and safety products, and processing and distribution of gas.

H1FY21 Results Performance (For the Period Ended 31 December 2020)

The company has registered a 16.6% YoY rise in revenue from continuing operations in H1FY21 to $17,774 million driven by strong sales growth across business divisions whereby revenue for  Bunnings increased by 24.4% to $9,054 million, Kmart’s revenue increased by 9% to $5,441 million and Officeworks’ revenue increased by 23.7% to $1,523 million. This was driven by higher demand for the company’s products as customers spent additional time working, learning, and doing projects at home. The revenue from Chemicals, Energy and Fertilisers (WesCEF) decreased by 6.6% to $830 million whereas industrial and safety’s revenue increased by 4.7% to $898 Mn.

It reported a net profit after tax of $1,414 million from continuing operations, up by 25.5% YoY.

Financial Snapshot (Source: Company Reports)

Issued Sustainability-Linked Bonds

The company, on 16 June 2021, announced that it has received strong investor support for its first sustainability-linked bonds issue worth AUD1 billion in the Australian market. The issue got oversubscribed by around 2.5 times. The company will utilise the proceeds for general corporate purposes, including the refinancing of impending bond maturities in October 2021 and August 2022.

Outlook

The company continues to witness strong sales across its retail businesses through January and February 2021. The trend is expected to persist as the impact of higher spending of time at home by consumers and continued travel restrictions are expected to continue to assist higher demand in some of its businesses. Besides, the group will continue to invest in businesses and divisional digital capabilities which would aid in boosting the customer value propositions, expansion of addressable markets, and delivery of operating efficiencies.

Key Risks

The group is exposed to the risks of higher competition as well as the impact of ineffective execution of strategy and attrition of key talent. Any adverse regulatory or legislative change and contrary commodity price movements  pose great risks.

Valuation Methodology: Price/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Weekly Chart –

Source: REFINITIV

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

The stock has been on a strong winning streak. In the process, it has made a new high of $59.60 above the upper Bollinger band but has given a close below the same having come under profit booking move.  The technical indicator RSI with a reading around 70 and a flattish curve at the end suggests that bullish momentum is taking a breather while being in the overbought zone.

Going forward, the stock may have resistance around $60.27 whereas support could be around the 23.6% retracement level of $52.69.

Stock Recommendation

The stock price of the company rose by ~16.3% in 6 months. It has made a 52-week low and high of $42.903 and $59.600, respectively.

We have applied Price/Sales based relative valuation (on an illustrative basis) and there are expectations that the stock price might witness a decline of low double-digit (in % terms). We have applied a discount to Price/Sales Multiple (NTM) (Peer Average) considering fall in the net assets as well as associated business risks.

Considering the movement of the stock price, we advise the market players to liquidate the stock.

Thus, we give a “Sell” recommendation on the stock at the current market price of $58.630 per share, down by 0.796% on 1^st July 2021.

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.

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