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Wesfarmers posts bumper profit, but clouds loom

Nicki Bourlioufas  |  16 Feb 2017Text size  Decrease  Increase  |  

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The retail and industrials conglomerate posts a $1.58-billion half-year profit after tax for 1H17, up 13.2 per cent on the back of higher coal prices and strong performances at Bunnings, Kmart and Officeworks.

 

However, Wesfarmers' (ASX: WES) Coles supermarket business is struggling to maintain market share in the face of strong competition from ALDI.

Earnings for Coles supermarkets fell 2.6 per cent to $920 million for the half-year ended 31 December 2016, while earnings from its home improvement business, including the Bunnings hardware chain, rose 3 per cent to $722 million, from the same period a year earlier.

The outlook for Coles is disappointing, with discount grocer ALDI expanding across Australia. This will keep a cap on Wesfarmers’ earnings growth overall, said Johannes Faul, an equities analyst with Morningstar.

“We think Coles’ margins are going to tighten further. We’ve seen margins tighten in the first half, and we’d argue that they will keep tightening in the second half, with Coles planning to cut prices in the third quarter and possibly the fourth quarter to try to maintain market shares in the face of competition,” he said.

“Margins are likely to come under pressure up until 2020-21 when ALDI’s growth will slow down,” Faul said.

Wesfarmers’ managing director, Richard Goyder said total retail earnings were in line with the prior corresponding period, with very strong results reported for Bunnings Australia and New Zealand, Kmart and Officeworks.

“The continued momentum in these businesses was particularly pleasing and reflects the strong market positions they have each established,” he said. “Costs of doing business were well managed, partially offsetting lower gross margins.”

In a surprise announcement, Wesfarmers also said it is considering selling its profitable Officeworks business, possibly through an initial public offer (IPO). Officeworks’ earnings of $62 million were 5.1 per cent higher, with revenue growth of 5.9 per cent. Earnings have doubled since 2007 when Wesfarmers bought the business.

“Officeworks is well positioned for future growth with a strong competitive position and ongoing initiatives to grow its addressable market. In light of its performance, options to monetise the value created for shareholders, including via an initial public offering, are being evaluated. The business will be retained if divestment options do not meet Wesfarmers’ valuation hurdles,” the company said.

Earnings for the Industrials division increased to $377 million for the half, $355 million higher than 1H 2016, largely reflecting the significant increase in coal prices and strong production in the second quarter of the financial year.

Wesfarmers also announced yesterday its Industrials division head Rob Scott will succeed Mr Goyder as managing director when he steps down towards the end of 2017, after more than 12 years in the role.

Buoyed by the profit increase, Wesfarmers shares closed higher at $43.33, up 2.9 per cent.

As at February 11, 2017, the 12 analysts surveyed by Thomson Reuters, offering 12-month price targets for Wesfarmers, had a median target of $42.16, with a high estimate of $57.00 and a low estimate of $34.50. 

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

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