Wesfarmers: Result 2016

A terrible Resources result hurt 2016 profit but, as ever, it was Bunnings to the rescue.

‘Wesfarmers profit plunges 83%’, screamed the headlines. Well yes, but you would have already known the cause from the company's strategy day in June, when management said it would take writedowns on Target and the Curragh coal mine in its 2016 results (see Wesfarmers showcases its strategy on 29 Jun (Hold – $39.36)).

Excluding the $2.3bn worth of impairments and restructuring charges related to Target and Curragh, the results were more mundane than the headlines might suggest. While Wesfarmers’ revenues rose 6% to $66bn, $1bn of that came from the inclusion of British acquisition Homebase for the first time. Otherwise the main feature of the company’s 2016 result was that – for once – the poor-performing divisions overshadowed the best.

Table 1: Wesfarmers result 2016
Year to 30 June 2016 2015 /(–)
Revenue ($m) 65,981 62,447 6
EBITDA ($m) 4,903 4,978 (2)
EBIT ($m) 3,607 3,759 (4)
NPAT ($m) 2,353 2,440 (4)
EPS (c) 209.5 216.1 (3)
DPS (c) 186.0 200.0 (7)
Franking (%) 100 100 n/a
* Final dividend 95 cents, ex date 29 Aug
Note: Figures are underlying results

Operating profit fell 4% during the year and, for the first time since 2010, underlying earnings per share fell 3% (see Table 1). With free cash flow falling 9% to $2bn, the Homebase renovation requiring capital and net debt standing at $7.1bn, something had to give. It did – management cut the final dividend from $1.11 a share to $0.95 (ex date 29 Aug).

In recent years results have been driven by Bunnings, Kmart and Coles. The first two continued to perform brilliantly, with strong same-store sales growth helping earnings to rise 12% and 9% respectively. But Coles’ profit growth slowed to just 4%, with the supermarket chain needing to deal with Woolworths’ investments in price and service, as well as Aldi’s store rollout in South Australia and Western Australia.

Target lost $50m (before restructuring charges) and will take a few years to turn around. The Industrials businesses were mixed, with WesCEF having a bumper year but Industrial & Safety still underperforming while management undertakes a restructuring. But it was the Resources business that really disappointed with a loss of $310m as coal markets remain in turmoil. It’s hard to see when losses will end here.

2017 will be a tough year. Bunnings could face a fire sale of Masters’ inventory (see our Woolworths review tomorrow), Coles’ growth will be subdued, and losses will continue in Resources. If market malaise sets in, though, we’ll be waiting.

With Bunnings and Kmart growing in value, and valuations of smaller assets like Officeworks too low, our sum-of-the-parts valuation looks conservative, especially as free cash flow should improve from here. For that reason we’re lifting our Buy price to $38 and our Sell price to $55, which means Wesfarmers remains a HOLD.

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