Australia | Jun 07 2021
After briefing on its multitude of businesses, Wesfarmers' priorities can be summed in terms of enhanced digital investment and product expansion, both vertically and through adjacent categories
-Incremental investment targeting digital aspects of the business
-Further expansion of hardware a priority through commercial trade
-Wesfarmers evaluating ammonia, ammonium nitrate expansion
By Eva Brocklehurst
When you think of Wesfarmers ((WES)) you think of strolling into Bunnings on a Saturday to shop. Right? Or Kmart and Target. Yet there is more to the conglomerate than retailing, albeit the other categories contribute a relatively small amount to group earnings. It doesn't stop there, with plans to continue growing the company's reach both vertically and via adjacent categories.
At its strategy briefing, the first in two years, Wesfarmers covered them all, highlighting it will make an incremental investment of around $100m over the medium term, spanning several initiatives that are primarily around building out the digital aspects of the business.
Wesfarmers will review its supply chain & distribution centres and investment in data/analytics while also expanding several categories within the hardware segment. Beyond FY21, Jarden envisages a material opportunity for Wesfarmers to expand the group's addressable market, although cautions significant investment will be required.
The broker believes Wesfarmers is one of the best positioned local retailers because of its scale, brands and more than $5bn in balance-sheet capacity, noting there are more than 400 people in its Advanced Analytics Centre while the Flybuys loyalty program, a 50-50 joint venture with Coles ((COL)), has also materially increased staffing over the past 18 months.
The company has narrowed the range of its net capital expenditure guidance to $650-700m from $650-800m and this includes the conversion of Target stores and the development of Mount Holland lithium.
Wesfarmers is also accelerating its digital capability through leveraging its investment in Catch, the online shopping experience, expanding the product range and providing flexible shopping and fulfillment options.
Catch will have another fulfillment centre in NSW in FY22, complementing the existing one in Melbourne. Around 45% of orders for Catch come from the mobile app and, relative to competitors, Macquarie notes brand awareness is low, so Wesfarmers is intent on investing in infrastructure and long-term growth initiatives.
In the short term Jarden, not one of the seven monitored daily on the FNArena database, believes the catalyst for Wesfarmers will be capital management and retains an Overweight rating and $59.00 target.
Yet Goldman Sachs, also not one of the seven, suspects digital investment and automating the supply chain will take up an increased amount of management's time and capital over the medium term. The broker acknowledges management is looking to size the balance sheet appropriately in a tax effective way and has not yet made a decision about how this will occur.
Acquisition opportunities are still being evaluated although the availability of capital has not meant this has increased as a priority, the broker observes. Goldman Sachs has a Buy rating and $59.70 target.
Citi points out Wesfarmers separates its capital management decisions from the funding of M&A, noting the company's intention is to return capital tax effectively where possible. The broker assesses Wesfarmers is being disciplined regarding transformative M&A in an environment of elevated asset prices.
Credit Suisse agrees that large-scale acquisitions are unlikely with the company homing in on adjacencies to those businesses where it is an incumbent and has scale advantages.
The database has one Buy rating (Macquarie), five Hold and one Sell (Citi). The consensus target is $53.45, signalling -3.2% downside to the last share price.
Macquarie notes Bunnings has experienced phenomenal growth for the past 25 years but remains open to further expansion through commercial trade. Growth has moderated, Wesfarmers highlighted in the briefing, as store traffic has returned and Bunnings is experiencing volatility in monthly sales.