Wesfarmers

Deflation isn’t just affecting Woolworths, which reported weak sales growth in the first half of 2012 (see 1 Feb 12 (Long Term Buy – $24.92)). It’s also hitting the Wesfarmers-owned Coles, which yesterday reported a 14% lift in first half profit, lower than market expectations. But it was still an impressive result—particularly as the liquor operation is underperforming—and it highlights that Coles under Ian McLeod is becoming a bigger threat to Woolworths.

Almost all of Wesfarmers’ other retail businesses, including stalwart Bunnings, performed well. Target was the fly in the ointment, but margins have looked too-good-to-be-true for some time. Kmart has staged a remarkable turnaround from breakeven a few years ago to making almost $200m in earnings before interest and tax (EBIT) in the half to 31 December.

Elsewhere, the Resources division produced a flat result, belying its usual volatility. The Insurance arm produced a weak profit, down 74%, largely due to the catastrophes that have also dogged the rest of the sector.

All up, Wesfarmers revenues rose 6% to $29.7bn. Underlying profit, excluding a grab bag of one-off profits and writedowns, rose 5% to $1,203m. One of those writedowns was a $181m hit to industrial gases business Coregas (formerly Linde Gas), which Goyder acquired (and paid too much for) in 2007 (highlighted in Wesfarmers hauled over the Coles from 11 Nov 08 (Hold – $19.65)). From earnings per share of 102 cents, a fully franked interim dividend of 70 cents (ex date 21 Feb) was declared.

We’re due a more comprehensive review of Wesfarmers following reporting season, at which point we’ll update the valuation. The stock is down 4% since 19 Aug 11 (Hold – $30.41) and remains a HOLD.