Wesfarmers’ Diversified Portfolio Delivers Solid EPS Growth, With Strengths Offsetting Weaknesses

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

The board declared a AUD 0.88 dividend per share, up 10% on the prior first half and slightly lagging the 14% increase in EPS to AUD 1.22. Although we expect weaker earnings in the second half, particularly for departments stores Kmart and Target, we continue to expect a higher dividend payout ratio for the full year, closer to 85%. We estimate fiscal-year 2023 EPS at 2.25 and DPS of AUD 1.91, offering a 3.9% yield at current prices.

However, shares screen as overvalued. We continue to expect a general retail slowdown as COVID-19-distorted consumption patterns normalise in 2023. We anticipate the rising cost of living due to higher mortgage rates and consumer price inflation to force households to lower their spending on nonessential items. Within Wesfarmers’ suite of businesses, we expect its department stores to be hit most.

While we anticipate hardware sales to be more robust, the near-term outlook for consumer demand is more uncertain than usual because of the speed of the Reserve Bank’s interest rate tightening. We anticipate a considerable lag between interest-rate hikes and their full impact on consumption. Please see our Industry Pulse, “Australian Retailing: Fourth-Quarter 2022″ published on Dec. 14, 2022, for more details on our the sector’s near-term outlook.

Already softening housing starts and falling property values could hurt Bunnings’ sales by more than we expect but would be unlikely to materially change our long-term outlook for Australia’s largest home improvement retailer, and hence our intrinsic valuation. Bunnings accounted for 60% of first-half earnings, while the department stores contributed 22%.