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Wesfarmers: FY21 result slightly negative as COVID lockdowns slowing sales growth in FY22

Timothy Anderson

Timothy Anderson is a contributor with the Australian Stock Report and is currently in his final year of studying a Bachelor of Applied Economics and a Bachelor of International Relations and Politics at the University of Canberra. Tim has a genuine passion for economics, specifically in macroeconomic analysis including how certain macroeconomic policies and indicators affect financial markets and the economy, as well as how these factors affect personal investment strategies. Tim currently holds RG146 Tier 1 Generic Knowledge qualifications.

Wesfarmers (ASX: WES) is an Australian conglomerate that cover businesses such as home improvements and outdoor living (Bunnings), apparel and general merchandise (Kmart), office supplies and in the industrial sector with businesses in chemicals, energy, fertiliser, lithium and industrial safety products. Wesfarmers has a market capitalisation of A$71.7 billion.

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What are the key features from Wesfarmers FY21 result?

Wesfarmers’ NPAT from continuing operations (excluding significant items) increased 16.2% to $2.4 billion. This outcome reflects strong performance across Wesfarmers businesses.

Revenue for Bunnings increased 12.5% to $16.9 billion for FY21, with earnings increasing 19.7% to $2.2 billion. Growth in consumer sales was particularly strong as customers spent more time working and undertaking projects at home during the period.

Officeworks’ revenue of $3.0 billion increased 8.7% on FY20, while earnings increased 7.6% to $212 million. Solid earnings growth for FY21 reflected strong sales growth partly offset by margin pressure, changes in sales mix and higher supply chain costs.

Revenue in Wesfarmers’ Chemical, Energy and Fertiliser businesses was $2.1 billion (up 2.9%) while earnings fell 2.5% to $384 million. Earnings growth in the Energy and Fertilisers businesses was offset by lower earnings in the Chemicals business.

The Industrial and Safety businesses delivered revenue of $1.9 billion (up 6.3%) and earnings increased 30% to $70 million. Earnings growth was supported by higher sales and increased operating efficiencies at Blackwoods, as well demand growth from Coregas’ industrial and healthcare customers.

Kmart Group’s revenue increased 8.3% to $10.0 billion for the year. Earnings before significant items increased to $693 million, up 69%. Kmart is benefiting from the restructure of the Target business (now completed), strong growth in online sales and lower clearance costs.

Wesfarmers will pay a fully franked final dividend of 90 cents per share. This takes the full-year dividend to 178 cents per share, representing a payout ratio of 85% of earnings. In addition, Wesfarmers proposes to make a capital return to shareholders of $2.00 per share. This ensures a more efficient capital structure for the Group while maintaining balance sheet capacity to make acquisitions.

 

What is the outlook for Wesfarmers?

Wesfarmers management does not provide specific earnings guidance for FY21.

Wesfarmers management noted that the continued impact of COVID-19 lockdowns. Sales in the Group’s retail divisions have been affected by recent lockdowns that have required store closures and restricted trading in multiple regions, including New South Wales and Victoria. Most notable is that Bunnings’ sales for the first 7 weeks of FY22 have declined 4.7% on the same period in FY21. Continued lockdowns, while the short term, may have a negative impact on Wesfarmers FY22 earnings.

 

What is the market reaction?

The initial market reaction to Wesfarmers FY21 results is slightly negative as Wesfarmers’ share price is down 2.3% to $62.48 (27 August 2021). Wesfarmers trades at a P/E ratio of around 30 and a dividend yield of around 2.5% (fully franked).


Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purposes only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceedings. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

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