Morningstar

Morningstar, Inc.

Equity Bottom-Up

Wide-moat Wesfarmers had bad news awaiting investors, just before kicking off its 2019 Strategy Day. The market wasn’t impressed, with the shares declining about 5%, but remaining overvalued. Severe competition in the department store sector is stifling sales growth at discounters Kmart and Target--together they represent Kmart Group. Price cutting and elevated promotional activity slashed their gross margins in the second half of fiscal 2019. In addition to structural headwinds, discretionary…

Wide-moat-rated Wesfarmers continues efforts to diversify its portfolio away from retailing with its latest proposed deal. The conglomerate has now attempted two acquisitions of resource companies since Rob Scott took the helm. Unintended or otherwise, both acquisitions would expose Wesfarmers to the high-growth electric vehicle, or EV, market, a move which certainly has strategic merit. We forecast EVs to grow to 15% global penetration of new car sales in 2028 from 1% in 2017. Following the…

Wide-moat-rated Wesfarmers went ex-special dividend on Feb. 26, 2019, and we adjust our fair value estimate accordingly for the cash leaving the business. At last week’s results, the firm announced a special dividend of AUD 1.00 per share, returning AUD 1,134 million to its shareholders. We lower our fair value estimate to AUD 28 from AUD 29. All our forecasts are unchanged. Wesfarmers’ balance sheet remains conservatively geared following the special distribution, with net debt/EBITDA at 1.4…

We upgrade Wesfarmers’ economic moat rating to wide from narrow following the demerger of the no-moat-rated Coles segment. Our wide moat rating is chiefly underpinned by the highly profitable and market-leading Bunnings hardware business, the key earnings contributor of Wesfarmers post-demerger.
Analyst: Johannes Faul, CFA

We recommend that Wesfarmers shareholder vote FOR the proposed resolution at the scheme meeting on Nov. 15, 2018, to separate Coles from the group.
Narrow-moat-rated Wesfarmers' management is suggesting a material restructure of the group with the demerger of Coles, separating the second-largest Australian food and liquor retailer from the core Bunnings home improvement retail stores. The two businesses account for about two thirds of group EBIT and have very different investment…

Australia

Wesfarmers Ltd. owns retail chains, operates mines, writes insurance, manufactures and distributes industrial products, manufactures fertilizers and chemicals, and distributes liquefied petroleum gas and medical and industrial gases.

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