Share to Buy: Wesfarmers Limited (WES)

Wesfarmers (WES) is a diversified group with operations in hardware retailing, supermarkets, liquor and petrol, discount department stores, industrial supplies, coal mining, gas, fertilisers and chemicals.

Its portfolio comprises of some of Australia’s biggest and well-known brands like Coles, Target, Kmart and Bunnings.

Insurance sale

Last month, Insurance Australia Group (IAG) agreed to buy WES’ insurance underwriting business for $1.85 billion.

Wesfarmers is widely believed to have gotten a good price for from IAG. The insurance underwriting business generated only $136 million EBITA in FY13.

That implies a transaction multiple of 13.6x, which is not cheap and suggests to us WES won out in the deal.

The IAG deal followed WES’ decision to sell its 40% stake in WA-based industrial gas producer, Air Liquide (ALWA), for $100 million.

Combined, WES netted approximately $2 billion from the two transactions with the cash inflow improving an already healthy balance sheet – net debt to equity was just 17% in FY13.

With the balance sheet in good shape and no major capital spending programs on the horizon, we anticipate WES will use the proceeds to reward shareholders via a capital return initiative.

1Q14 sales

WES’ 1Q14 sales results indicated food and liquor sales for the September quarter were $6.9 billion, up 4.4% on the previous corresponding period.

Coles recorded comparable food and liquor store sales growth of 3.4%, with comparable food store sales growth of 4.0%.

In a concern, the group noted food and liquor price deflation of 2.5%, due to significant fresh produce deflation and Coles’ investment in lower prices.

Whilst price deflation has been an ongoing issue for retailers, WES is faring better than its major rival Woolworths, which suffered food and liquor price deflation of 4.3% in 1Q14.