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How will the Coles split impact Wesfarmers shares?

Johannes Faul, CFA  |  29 May 2018Text size  Decrease  Increase  |  
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Wesfarmers' (ASX: WES) management is significantly altering the group's DNA with the proposed demerger of grocer Coles, closing sometime in fiscal 2019 if approved by shareholders.

There are aspects to like in the demerger, which will separate Coles from the core Bunnings home improvement retail stores. The two businesses—accounting for about two thirds of group EBIT—have very different growth prospects, and the split will provide the residual group with a greater capacity to engage in impactful M&A transactions given the smaller size and stronger balance sheet of Wesfarmers postdemerger.

However, we can't see a material value uplift, as we don't expect the cash flows generated by the existing businesses to be enhanced by simply splitting them apart.

Although limited upside potential to our fair value estimate of Wesfarmers exists in the order of 4% on our preliminary assessment, it is mainly from a lower cost of equity for Coles than for Wesfarmers today.

Pending firm capital structures and the finalisation of our moat ratings for the new entities, we reiterate  our fair value estimate of AUD 37.50 per current Wesfarmers share. In our base case, we continue to expect Bunnings to grow strongly in Australia and New Zealand, but we believe the market is much more optimistic on Bunnings' prospects and is pricing it close to perfection.

 

Johannes Faul, CFA is an analyst of Retail and REITs at Morningstar. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf.  You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

is a director of equity research, Morningstar ANZ.

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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