Two stocks to sell - Wesfarmers Ltd and AGL Energy Ltd

Wesfarmers Ltd

WES Details
 
Withdrawal of Office works IPO: Recently, the group has undertaken a strategic review of Officeworks, which included a potential initial public offering (IPO) of the business announced on 15 February 2017. However, considering the current equity market conditions, the company has determined that an IPO of Officeworks in the current scenario would not realize appropriate value and postponed the IPO decision. Since acquiring the business in 2007, Officeworks has more than doubled its earnings and improved its return on capital from 5.7% in 2009 to 13.9% in H1FY17. Further, Officeworks is well positioned for future growth with a strong, competitive market position and ongoing initiatives to grow its addressable market. Moreover, the management indicated that the group is comfortable retaining Officeworks in its portfolio and the business would be divested only if it is in the best interests of Wesfarmers’ shareholders.
 
Q4FY17 performance to be impacted by Cyclone Debbie: On production and operations front, overburden removal for the quarter ended 31 March 2017 increased by 2.1% than the previous quarter, driven by improved performance of the overburden removal fleet. Coal production declined by 1.5% to 3,155,000 tons, while Metallurgical coal production of 2,268,000 tons was in line with the previous quarter and steaming coal production of 887,000 tons was 4.7% lower than the previous quarter. For the 12 months to 31 March 2017, metallurgical coal production increased by 11.2% to 8,326,000 tons and steaming coal production increased by 10.8% to 3,612,000 tons. Further, production and sales volumes for Q4FY17 are expected to be affected by the impacts of Cyclone Debbie on mine and rail operations. As a result, export metallurgical coal sales volumes are expected to be at the lower end of the previously guided range of 8.0 to 8.5 million tons for FY17. Given the intense competition in the industry, challenging business environment and added headwinds in the form of new entrants, we give a “Sell” rating on the stock at the current market price of $ 40.91
 

WES Daily chart (source: Thomson Reuters)

AGL Energy Ltd

AGL Details
 
Development of $295 million power station in South Australia: AGL Energy Ltd (ASX: AGL) announced that it would invest $295 million to develop a 210 MW reciprocating engine power station, to be known as the Barker Inlet Power Station, alongside the company’s Torrens Island Power Station site near Adelaide, South Australia. Construction of Barker Inlet Power Station is expected to begin in the third quarter of the 2017 calendar year, with full operation in the first quarter of the 2019 calendar year. The new power station will replace two of the four Torrens A turbines, which AGL will progressively mothball from 1 July 2019. Barker Inlet Power Station will comprise 12 reciprocating engines capable of generating approximately 18 MW of output each and operating at high efficiency with a lower heat rate than other forms of fast-start plant currently available
 
Gas margins to decline in FY17: During H1FY17, the company reported a statutory profit after tax of $325 million, which was $774 million more than the prior corresponding period, due to the impact of impairments and movements in the fair value of financial instruments in H1FY16. The underlying profit after tax grew by 4% to $389 million, led by strength in the wholesale electricity market and the ongoing delivery of AGL’s cost reduction programs, offsetting a decline in gas margins. On guidance front, AGL expects the underlying profit after tax for the FY17 to be within the top range of $720 million to $800 million. However, margin from gas segment is expected to be ~$100m lower in FY17 against FY16 on account of rollover of Queensland wholesale contracts, mild weather in H1FY17 and supply issues. The stock has risen 21.8% in six months, while it was up 36.6% in last one year as on June 14, 2017, and now trades at elevated levels. We give a “Sell” recommendation on the stock at the current price of $ 25.50
 

AGL Daily chart (source: Thomson Reuters)

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