Wesfarmers Limited

A Quick Look on Latest Announcements:Wesfarmers Limited (ASX: WES) is into a diverse business operation which covers home improvement and outdoor living; apparel and general merchandise; office supplies; and an industrials division with businesses in chemicals, energy and fertilisers, and industrial and safety products. The market capitalization of the company stood at ~A$43.7 billion as on 5^th September 2019. Recently, the company has announced that Kidman Resources shareholders voted in favour of Scheme of Arrangement under which Wesfarmers will acquire 100% of the issued ordinary shares in Kidman for $1.90 cash per share. The group reported a net profit after tax of $5,510 million in FY19. The reported profit includes post-tax significant items of $3,171 million relating to discontinued operations including gains on the demerger of Coles and disposals of Bengalla, KTAS and Quadrant Energy, which were completed in the first half of the financial year. The following picture provides a broader idea of the company’s important numbers:


Source: Company Presentations

Capital Management:Operating cash flow of $2,718 million were 33.4% below the prior year, primarily due to the demerger of Coles and disposals of Bengalla, KTAS and Quadrant Energy. Divisional cash generation from continuing operations remained strong at 97% in line with the previous year. The Board of Directors has declared a fully-franked final ordinary dividend of 78 cents per share, which reflects Wesfarmers’ earnings from continuing operations, and Wesfarmers’ dividend policy that takes into account the available franking credits, current earnings as well as cash flows, future cash flow requirements and the targeted credit metrics. This has brought the full-year ordinary dividend to $1.78 per share and total dividends to the shareholders this year of $2.78, which includes fully-franked special dividend of $1.00 per share paid in the month of April 2019.

Outlook for FY20:The group will continue to build on its unique capabilities and platforms to take advantage of growth opportunities within its existing businesses, recently acquired investments and to pursue transactions that create value for shareholders over the long term.

Stock Recommendation:On 5^th September 2019, the stock of WES closed at a price of $39.210 per share. Currently, the stock is trading near its 52-week high level of $40.43x, and, thus, it can be said that the stock might witness some sort of correction in near future. The company has already given a 14.36% return in the last six months, and 25.73% returns on a YTD basis. Hence, considering the aforesaid facts and current trading levels, we give an “Expensive” recommendation on the stock at the current market price of A$39.210 per share (up 1.738% on 5 September 2019).
 

Metcash Limited

Decent Top-line Growth in FY19: Metcash Limited (ASX: MTS) operates predominantly in Australia, and its reportable segments are Food activities, Liquor activities as well as Hardware activities.As per ASX, the market capitalisation of the company stood at A$2.66 billion as on 5^th September 2019. Recently, the company released its results for FY19 in which it witnessed a rise in its top-line and reported PAT. The company’s sales revenue encountered a rise of 1.8% on a YoY basis and stood at $12,660.3 million. The major contributor in revenue, Food segment, was flat with sales at $8,794.3 million. However, liquor revenue increased by 5.6%, which can be considered at decent levels. Reported profit after tax stood at $192.8 million as compared to reported loss of $148.2 million in the prior year.


Key Numbers (Source: Company Reports)

Dividends: The Group declared a final dividend of 7 cents per share with total dividends of 13.5 cents for FY19.The company has a dividend payout ratio of 60%. At the current market price of A$2.970 per share, its annual dividend yield stood at 4.61%

Financial position in FY19: Solid cash generation from the pillars and an ongoing focus on working capital led to operating cash flow for the year of $244.9 million.The cash realisation ratio was 92%, in line with the historical average. Net debt at the end of the financial year was $42.9 million. The higher debt is largely due to the $150 million share buy-back in the month of August 2018. The company refinanced $450 million of debt facilities in the second half of the financial year and cancelled approximately $100 million debt securitisation facility.

Future outlook:In FY19 results presentation, with regards to Food, the company stated that, in Supermarkets, there has been continued improvement with respect to the sales trajectory of the wholesale sales (excluding tobacco) through first 7 weeks of FY20. The company also added that Supermarkets would continue to deploy towards growth initiatives through MFuture program and anticipates related operating expenditure in FY20 to be in accordance with that incurred in FY19.

Stock performance: Currently, the stock is trading at a PE multiple of 14.090x, which is comparatively cheaper as compared to its peer Woolworths Group Limited, which is trading at a multiple of 17.790x.On 5^th September 2019, the stock of MTS ended at $2.970 per share. In the previous six months, the company has given a total return of 9.74%. Hence, considering the above-stated facts, we give a “Buy” rating on the stock at the price of A$2.970 per share (up 1.365% on 5 September 2019).

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