Wesfarmers: Result 2012

The positive market response to yesterday’s Wesfarmers result—the stock rose 4% on the day—was somewhat mystifying. It’s true that Coles and Kmart performed admirably, with divisional profit rising 16% and 31% respectively. There’s no doubt that Wesfarmers has done a great job turning around these retailers, and there’s probably a little more upside to come.

All up, revenues for Wesfarmers rose 6% to $58bn. Net profit rose 11% to $2.1bn, with earnings per share also rising 11% to 184 cents. A fully franked final dividend of 95 cents was declared (ex date 21 Aug).

But the outlook for many of the company’s other businesses looks clouded. In 2012, profit from the Resources division rose 19%, helped by higher coal prices in the first half and higher volumes in the second. But coal prices have recently fallen sharply, which will partly offset the benefit of last year’s expansion of the Curragh mine.

Bunnings also looks to be slowing.  Long a Wesfarmers stalwart, the home improvement retailer increased profit 5% but margins fell slightly, as did return on capital. With Bunnings preparing to fight Woolworths’ Masters, the days of double digit profit increases are probably over.

The company’s insurance division has had a horrible few years and, barring another year of large catastrophes, should bounce back in 2013. But the Industrial and Safety division, which boosted profit 15% in 2012, is facing a resources industry slowdown this financial year.

There were a number of one-off expenses in the 2012 result which shouldn’t recur this financial year. For that reason alone Wesfarmers stands a good chance of lifting profit in 2013. But with Bunnings slowing down and a couple of resource-related divisions set to go backwards, there’s potential for market disappointment.

As the stock is up 14% since Wesfarmers versus Berkshire from 16 Apr 12 (Hold – $29.51), it’s approaching a downgrade. We’ve no reason to lift the sum-of-the-parts valuation from that review so, for now, Wesfarmers is an expensive-looking HOLD.