Wesfarmers Limited (ASX: WES)

Positioning for growth but trading at higher levels - Wesfarmers has a diverse business operation across supermarkets, liquor, hotels and convenience stores, home improvement, office supplies, and department stores. The foremost objective of the Group is to deliversatisfactory return to its shareholders. It targets to have better working capital efficiency with support from strong discipline in terms of capital expenditure or any other investment decisions. While planning to acquire a business, the Group checks that whether it is feasible or not by applying various filters relating to being competitive and providing long-term returns to its shareholders.

The Group has a disciplined portfolio management. Its primary objective is to strengthen the existing business through operational excellence and to satisfy the customer needs.  The Group earned a rating of A3 from Moody’s and a rating of A- from Standard & Poor’s that is of a stable outlook. As on date, under the Group’s ownership, over $8 billion of capital has been invested in the business across the store network, supply chain and online channel. Since 2011, Wesfarmers has added on an average 12 stores per year to its network and targets to add 10-14 net new stores per annum.

The Group has divested its Homebase business in the United Kingdom and Ireland to a company associated with Hilco Capital. It has now completed divestment as at June 12, 2018. This move was said to be in the best interests for its shareholders and will be supporting the ongoing reset and repositioning of its Homebase business. The Group aims to maintain a strong balance sheet and sustainable practices like it leverages its data and digital capabilities and has an active portfolio of strong businesses with decent momentum. It makes an investment in a new platform in a disciplined manner for long-term growth. Thus, the overall aim is to deliver superior returns over time by strengthening its business development capabilities.


Long-term financial performance (Source: Company Reports)

It also proposed a demerger with Coles that would reposition the Group’s capital employed towards higher growth opportunities. The Group is expecting that in FY18 its capital expenditure will be around $1.3 billion but is subject to net property investment. It is expected that after a demerger with its Coles division, Wesfarmers will be able to focus more on its growth opportunities.

The Group has developed long-term collaborative partnerships with many suppliers, and prices have been reduced for customers for eight consecutive years. On the other hand, Wesfarmers expects to record a loss of between $323 million and $406 million on the disposal of Bunnings UK, and this is raising some issues although the underperforming business is being ripped off. The Group also considers listed and unlisted companies for acquisition. However, the group does not look to fill the gap created by Coles demerger for just any acquisition as the group indicated to stay small if shareholders return can be decent. Meanwhile, WES has snapped a 5 per cent equity interest and is forming a joint venture with online apparel group, ONTHEGO in an attempt to lift digital offerings. It is anticipated Bunnings can account for over 50 per cent of Wesfarmers’ earnings and over 60 per cent of its enterprise value and can unlock the key to success for the "new" Wesfarmers. Since the start of the year, the stock was up by 4.25 per cent and by 5.27 per cent in last one month. The stock is inching towards its 52-week high and looks a bit expensive at current price of $46.960.

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