Wesfarmers: Interim result 2014
Recommendation
Wesfarmers has reported an solid result for the half-year to 31 December, with revenue up 4% to $31.9bn, underlying earnings before interest and tax (EBIT) up 3% to $2.1bn and net profit up 11% to $1.4bn, boosted by a lower interest bill and a profit on the sale of Air Liquide WA.
Earnings per share rose 12% to $1.24 and the interim dividend per share was increased by 10% to 85 cents (fully franked, ex date 24 Feb). On a historic basis, that puts the stock on a fully franked dividend yield of 4.4%.
As usual, the result was driven by a strong performance from Coles, which increased revenue by 5% and EBIT by 11%. Food & Liquor increased EBIT by 12% to $755m, with its operating margin expanding from 4.8% to 5.1%. In its presentation, management pointed to various operating improvements over the past five years, including a 30% fall in absenteeism, a 30% increase in sales per full time employee and a 25% rise in sales per square metre.
Key Points
- Coles Food & Liquor margin passes 5%
- Target still struggling
- Price looks fair; Hold
Six months to 31 Dec ($m) | 2013 | 2012 | /(–) (%) |
---|---|---|---|
Trading rev. | 31,853 | 30,614 | 4 |
U'Lying EBIT | 2,104 | 2,043 | 3 |
NPAT | 1,429 | 1,285 | 11 |
EPS | 124 | 111 | 11 |
Int. DPS | 85 | 77 | 10 |
Franking (%) | 100 | 100 | 0 |
The day before the results, Wesfarmers announced that, from July, Coles managing director Ian McLeod will become Group Commercial Director of Wesfarmers, to be replaced at Coles by John Durkan. Durkan spent 17 years at UK supermarket group Safeway, ending up as Trading Director, before spending four years as chief operating officer of leading UK mobile phone retailer, Carphone Warehouse. He joined Coles in 2008 as Merchandising Director and became chief operating officer in June 2013.
The other retail businesses also generally performed well, with Bunnings EBIT up 9% to $562m, Officeworks EBIT up 11% to $42, Kmart EBIT up 6% to $260m. Target was again the exception, with EBIT falling 53% to $70m – and that’s from the first half of the 2013 year, which was itself down 20% from the prior year.
Missing the Target
The specific problem at Target in 2013 (aside from a number of more general ones, mostly due to a lack of investment over the years) was that ‘high levels of winter clearance activity’ delayed the launch of spring/summer ranges. Stuart Machin took over at Target last April and is focusing on reducing the historical reliance on high inventory and heavy promotions, ‘improving store standards, customer service and queue times’, and investing in the online store.
Six months to 31 Dec | 2013 | 2012 | /(–) (%) |
---|---|---|---|
Coles | 836 | 755 | 11 |
Bunnings | 562 | 518 | 8 |
Officeworks | 42 | 38 | 11 |
Target | 70 | 148 | -53 |
Kmart | 260 | 246 | 6 |
Insurance | 144 | 104 | 38 |
Resources | 59 | 93 | -37 |
Chemicals | 110 | 104 | 6 |
Industrial | 73 | 88 | -17 |
Other | 7 | 6 | 17 |
Corporate | -59 | -57 | 4 |
Total | 2,104 | 2,043 | 3 |
The Insurance underwriting operations (which are due to be sold to IAG, subject to regulatory approval – see ) made earnings before interest, tax and amortisation (EBITA) of $64m, although that included a $45m increase in reserves in relation to the 22 Feb 2011 Christchurch earthquake. On an underlying basis, EBITA rose 51% to $109m. Insurance broking EBITA rose 8% to $41m.
Excluding the sale of Air Liquide WA, the Chemicals, Energy and Fertilisers division increased EBIT by 6% to $110m, while Industrial & Safety EBIT fell 17% to $73m due to the reduction in mining investment. Resources EBIT fell 37% to $59m and now make up just 3% of the group total.
Free cash flow crept up 3% to $1.1bn, to 79% of net profit. After the payment of dividends and November’s capital return, net debt rose 20% to $5.3bn. However, the increased EBIT and lower interest costs meant that the former covered the latter by 12 times, compared to 9 times in the prior period.
The stock is up slightly since Wesfarmers: Result 2013 on 16 Aug 13 (Hold – $41.26), and with around $2.15 of earnings per share expected for the full year, the stock is on a price-earnings ratio of 20. That looks about right, but it leaves our Buy price of $30 looking unduly cautious and we’re going to raise that to $35. HOLD.