Since listing on the ASX in 1984, the company has recorded strong growth in assets and profits.
Wesfarmers owns several iconic Australian businesses, including supermarket chain Coles, hardware retailer Bunning’s Warehouse, discount department stores Target and K-Mart, and office supplies provider Officeworks. WES also involves in industrials supplies distribution, coal mining, fertilisers, chemicals and general insurance.
WES reported its third quarter retails sales results today, with the results coming in above market expectations.
The Coles business was the standout performer, with its Food and Liquor division sales growing by 7.1% and Convenience division sales increasing by 12.1%. These numbers beats its long term rival Woolworths (WOW) which only achieved 4.6% growth in its Australian Food and Liquor division.
We believe Coles has been stealing market share from Woolworths over the past few months, on the back of its aggressive expansion and discounting strategy.
Bunnings also delivered impressive results. The home improvement businesses grew its sales by 8.1%, also beating consensus estimates on the back of enhancements made to its customer offering and solid sales contribution from newly-opened stores.
Officeworks also delivered positive growth despite challenging operating conditions and subdued spending from small businesses. The office supplies division achieved 3.5% growth.
Target sales declined by 0.1%, due to the continued price deflation in general products, and lower volume of sales in electrical products. Target did manage to somewhat offset this by solid growth in apparel and homeware products.
Kmart sales slightly disappointed, with revenue falling by 2.5% due to price cuts. The lower prices has helped Kmart to increase its overall sales volume and may help them to grow its market share, which we believe will benefit the business over the longer term.
Shares not on sale
WES is trading at 16.5 times FY11 earnings, which looks fairly valued at current price levels.
If Coles continues to turn around and coal price remain solid, we do some further upside to WES’s valuation.
WES could also unlock significant value if it can spin off some of its non-core business, with some analysts finally losing patience with the company’s trademark diverse earnings base. Some investors have argued that WES has grown too big and has lost some operating efficiency due to the distinctive nature of businesses they currently own.
If WES spins off its fertiliser or general insurance businesses or its coal assets, it may help to unlock hidden value for WES shareholders. If these businesses were trading as standalone entities, they would undoubtedly attract greater takeover interest from domestic and international corporations.
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