Wesfarmers posted a first-half FY17 net profit of $1.577 billion, ahead of Ord Minnett’s forecast of $1.544 billion and up 13.2% on a year ago, with the Bunnings business in Australasia and the industrials division turning in better-than-expected performances while the key Coles operations disappointed.
A fully franked interim dividend of $1.03 a share was declared, beating our forecast of $0.96 a share.
For Coles, the retail chain’s like-for-like sales growth was strong, but earnings margins fell as price investment could not be funded by cost savings and operating leverage alone.
We expect the food and liquor industry to remain rationally aggressive. The Coles earnings margin decline is a concern, but we interpret it as price investments to meet Woolworths prices, rather than the commencement of a dangerous ‘tit for tat’ price war between the two big players in the Australian marketplace.
At Bunnings, the expansion in return on capital was driven by strong sales growth and capital recycling with earnings margins flat on a year ago.
The department stores business turned in a mixed performance – Kmart was strong although earnings margins are falling, while the Target turnaround now appears more difficult in the near term.
Performance in the industrial divisions has turned around, not only in the resources business (thanks to metallurgical coal pricing and production volumes), but also in the industrial and safety division and the chemical, energy and fertilisers business.
Wesfarmers valuation remains attractive following the share price decline, with the price-earnings multiple low and dividend yield a support. We have maintained our Accumulate recommendation on Wesfarmers and raised our target price to $45.50 from $45.00.