No UK Sizzle for Bunnings
Wesfarmers has pre-announced more than $1.2bn of significant items and a weak first-half FY18 result for its Bunnings UK and Ireland (BUKI) and Target divisions, with a strategic review of BUKI having commenced.
We have reduced our normalised EPS forecasts by 2.2% for FY18 and 6.5% for FY19. We maintain our Hold recommendation on Wesfarmers, but have lowered our target price to $41.00 from $44.00.
- BUKI and Target significant items – Wesfarmers has pre-announced more than $1.2bn in significant items, including impairment charges of $795m for BUKI and $306m for Target. BUKI saw a first-half FY18 earnings before interest and tax (EBIT) loss of $795m, while Target generated first-half EBIT of $33m. Wesfarmers announced that BUKI managing director PJ Davis was retiring, and that a review of the business had commenced.
- Management approach – The new Wesfarmers management is taking decisive action to address its underperforming businesses. Ambitions for Target have been reduced, with possible store closures and conversions to Kmart. A review of BUKI has commenced, focused on options to improve the trading performance of Homebase and further evaluating the performance of the Bunnings pilot stores. The findings of the review are to be provided at the 2018 strategy briefing in May or June. We believe a BUKI exit must be considered despite the significant costs, with another round of due diligence required.
Bunnings is expected to continue to perform well due to industry consolidation and its strong position in Australia and New Zealand, while BUKI has performed much worse than expected and the tail risk regarding an exit – or ongoing large losses – is increasing. Coles is enduring a more competitive Woolworths (WOW, Accumulate), which now has momentum and is gaining market share as the cost-saving efforts from Coles are having an impact on execution. The industrial divisions have improved due to cost savings and improved commodity pricing, although revenue growth remains difficult. Department stores are increasingly led by Kmart, which remains a strong EBIT contributor, while the EBIT ambitions for Target have been reduced.