Bye Bye Blighty

Wesfarmers is to sell its Bunnings UK and Ireland (BUKI) business to Hilco Capital, a UK-based international restructuring and refinancing company. Hilco will acquire the Homebase brand, store network, property, leases and inventory for a nominal amount, and Wesfarmers will be entitled to 20% of any equity proceeds on further sale by Hilco.

 

Completion of the transaction is expected by 30 June. Wesfarmers will record a loss on sale of £200–230m at its FY18 result.

 

The BUKI investment has destroyed shareholder value, which has dropped £1.3bn – equal to almost a year’s worth of dividends. However, Wesfarmers has exited the business at a much lower cost than our £631m forecast, reflecting well on the new management.

 

Wesfarmers also hosted a strategy day where it outlined the growth prospects for the various divisions. Management focused on organic growth across the businesses, with M&A not considered a priority. We noted the following key points:

 

  • The Bunnings online offering is likely to evolve over time, while the trade opportunity remains significant.

     

  • Coles’ digital platform and ‘Every Day Low Prices’ program will be areas of focus, with enterprise bargaining agreements expected to be a significant cost in FY19 and capital expenditure likely to increase.

     

  • Kmart is aiming for $10bn in sales and $1bn in earnings before interest and tax, while Target is to reduce its floor space by 20% with a focus on online and fashion.

     

  • In Western Australia, explosives-grade ammonia nitrate is expected to be in oversupply until the mid 2020s, creating a headwind for the industrials division.

     

We remain cautious about Wesfarmers’ future offshore M&A ambitions given its mixed track record. Management has learned from the BUKI experience, but we suggest such moves in future will be treated with significant scepticism.

 

Despite bold action by the new management, especially the BUKI exit and the scaling down of Target, the risk-reward equation no longer looks compelling to us due mainly to a lack of valuation support. We have downgraded our recommendation to Lighten from Hold and lowered our target price to $42.50 from $43.00.


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