Company Reports

Wide-moat Wesfarmers’ largest businesses had a surprisingly soft start to the new financial year. We now expect only low mid-single-digit EPS growth in fiscal 2025. But the real story is upcoming lithium sales. We continue to forecast the Covalent lithium project to spark solid EPS growth over the medium term, with first hydroxide sales expected from fiscal 2026. Our EPS CAGR estimate of 9% for the five years to fiscal 2029 compares with a CAGR of 6% for the five years to fiscal 2024. We lift our fair value estimate by 3% to AUD 44.50. The time value of money impact more than offsets the immaterial impact of our softer near-term outlook.

Wesfarmers is Australia's best-known conglomerate. Activities span discount department stores, office supplies, home improvement, energy manufacture and distribution, industrial and safety supplies, chemicals, and fertilizers. Business interests can be divided into two broad groups: retail and industrial.

The upcoming August 2024 reporting season will draw the line under a difficult year for Australian retailers in which they navigated soft demand and soaring labor costs. The combination results in a profit margin crunch and declining earnings for many retailers.

Like Morningstar, wide-moat Wesfarmers sees abundant sales growth opportunities in the core Bunnings business. There is also room to cut costs, in turn supporting operating margins and reinforcing its low-price value proposition. In its second-largest segment, Kmart, there are blue-sky opportunities to generate export sales with its private-label Anko brand, but any earnings are likely to be immaterial in the medium term. Digitization and capturing Generation Z loyalty remain key strategic priorities for its retailing brands. We consider shares in Wesfarmers significantly overvalued compared with our unchanged AUD 43 fair value estimate. At current prices and our fiscal 2025 earnings estimate, shares trade at a P/E ratio of 28. For a conglomerate with a 10-year EPS compound annual growth rate of 6%, we think the premium is unwarranted. Our valuation and earnings estimates imply a fair P/E ratio of 18.

Talk of interest rate cuts and impending tax cuts is sparking a rally in consumer cyclicals. We agree these factors improve the near-term outlook for consumer spending, with cyclical retailers more exposed. We expect the combined impact of fiscal and monetary tailwinds to underpin mid-single-digit growth in total retailing sales in the medium term—compared with our estimate of only 2% growth in fiscal 2024. But underlying our near-term forecast is a significant divergence across categories, with sales in cyclicals virtually flat and defensives up 4%.

Wesfarmers is Australia's best-known conglomerate. Activities span discount department stores, office supplies, home improvement, energy manufacture and distribution, industrial and safety supplies, chemicals, and fertilizers. Business interests can be divided into two broad groups: retail and industrial.

Wide-moat Wesfarmers’ first-half fiscal 2024 earnings broadly track our full-year expectations. However, the performance of the conglomerate's individual businesses varied considerably against our forecast. The discount department store segment, Kmart Group, significantly beat our estimate. We were expecting earnings to decline due to rising wages and soft demand. On the contrary, Kmart posted solid sales and earnings growth, highlighting the appeal of Kmart’s customer proposition and tight cost control against a challenging macroeconomic backdrop. The stellar performance of Kmart offset muted sales growth at Bunnings and a collapse in commodity prices cutting WesCEF’s earnings nearly in half.

E-commerce platforms have been outperforming physical stores recently. Transaction data from National Australia Bank suggests online retail sales in October lifted 10% on last year, while total retail trade was up only 1%, as reported by the Australian Bureau of Statistics.

We expect only modest discretionary goods sales growth in fiscal 2024, while interest rates stay high and household incomes struggle to keep up with inflation. With demand soft, discounts and promotions abound in discretionary retail, and with wages rising as well, earnings are under pressure. But for some, cost pressures are easing. Steep declines in global food commodity prices bode well for fast-food restaurants. Quick service restaurant operator no-moat Collins Foods and master franchisee narrow-moat Domino’s Pizza screen as undervalued.

We maintain our AUD 42 fair value estimate for shares in wide-moat-rated Wesfarmers. The conglomerate’s fiscal 2023 NPAT of AUD 2.465 billion was merely 3% below our estimate, and our longer-term estimates are largely unchanged. Our fiscal 2024 EPS estimate of AUD 2.23 implies earnings growth of 2%, weaker than the 5% achieved in fiscal 2023. At current prices, shares screen as overvalued versus our intrinsic assessment. Also, considering the mid-single-digit compounded earnings growth Wesfarmers generated in the past three years, and our outlook for similar muted earnings growth in the near term, a price/earnings ratio of 23 looks expensive. The board declared fully franked dividends of AUD 1.91 per share in fiscal 2023. We forecast the dividend to be maintained at AUD 1.91 per share in fiscal 2024, fully franked, offering a yield of 3.8% at current share prices or 4.5% at our fair value estimate.

We maintain our AUD 42 fair value estimate for shares in wide-moat Wesfarmers, which screens overvalued at current prices. Wesfarmers’ share in the Mt Holland project accounts for about AUD 3 per share, or 7%, of our fair value estimate in our base case. As more lithium supplies comes online over the next decade, we expect lithium prices to gradually moderate from current levels to around USD 15,000 per metric ton—in nominal terms. Our long-term lithium price forecast is based on our projections of mine supply and demand, mostly from electric vehicles. However, if lithium prices remained at around USD 50,000 per metric ton, our fair value estimate would increase by some 30% to about AUD 54 per share—all else equal.

We increase our fair value estimate on wide-moat Wesfarmers by 2% to AUD 42 following first-half fiscal 2023 results, driven by the time value of money. Our earnings estimates are virtually unchanged.

We maintain our fair value estimate at AUD 41 per share on wide-moat-rated Wesfarmers. As expected, the conglomerate’s earnings declined in fiscal 2022. However, the 3% reduction in underlying earnings to AUD 2.35 billion, or AUD 2.08, was less pronounced than our expectation of an 8% drop. Bunnings' stronger-than-expected sales, and WesCEF, buoyed by higher commodity prices, delivered the result.

Wesfarmers is Australia's best-known conglomerate. Activities span discount department stores, office supplies, home improvement, energy manufacture and distribution, industrial and safety supplies, chemicals, and fertilisers. Business interests can be divided into two broad groups: retail and industrial.

Wesfarmers is Australia's best-known conglomerate. Activities span discount department stores, office supplies, hardware/home improvement, liquid petroleum gas manufacture and distribution, industrial and medical gases, industrial and safety supplies, chemicals, and fertilisers. Business interests can be divided into two broad groups: retail and industrial. Wesfarmers employs more than 100,000 people across Australia and New Zealand.

Wesfarmers is Australia's best-known conglomerate. Activities span discount department stores, office supplies, hardware/home improvement, liquid petroleum gas manufacture and distribution, industrial and medical gases, industrial and safety supplies, chemicals, and fertilisers. Business interests can be divided into two broad groups: retail and industrial. Wesfarmers employs more than 100,000 people across Australia and New Zealand.

Wesfarmers is Australia's best-known conglomerate. Activities span discount department stores, office supplies, hardware/home improvement, liquid petroleum gas manufacture and distribution, industrial and medical gases, industrial and safety supplies, chemicals, and fertilisers. Business interests can be divided into two broad groups: retail and industrial. Wesfarmers employs more than 100,000 people across Australia and New Zealand.

Wesfarmers is Australia's best-known conglomerate. Activities span discount department stores, office supplies, hardware/home improvement, liquid petroleum gas manufacture and distribution, industrial and medical gases, industrial and safety supplies, chemicals, and fertilisers. Business interests can be divided into two broad groups: retail and industrial. Wesfarmers employs more than 100,000 people across Australia and New Zealand.

Wesfarmers is Australia's best-known conglomerate. Activities span discount department stores, office supplies, hardware/home improvement, liquid petroleum gas manufacture and distribution, industrial and medical gases, industrial and safety supplies, chemicals, and fertilisers. Business interests can be divided into two broad groups: retail and industrial. Wesfarmers employs more than 100,000 people across Australia and New Zealand.

Wesfarmers is Australia's best-known conglomerate. Activities span discount department stores, office supplies, hardware/home improvement, liquid petroleum gas manufacture and distribution, industrial and medical gases, industrial and safety supplies, chemicals, and fertilisers. Business interests can be divided into two broad groups: retail and industrial. Wesfarmers employs more than 100,000 people across Australia and New Zealand.