Wesfarmers: Trading well despite some disruptions
About the author:
- Author name:
- By Alex Lu
- Job title:
- Date posted:
- 12 November 2020, 9:59 AM
- Sectors Covered:
- Westfarmers' (ASX:WES) trading update overall for October YTD was better than we expected.
- Bunnings (total sales +25.2%) and Officeworks (+23.4%) were particularly strong
with Catch also maintaining good momentum (+114.4%).
- LFL sales at Kmart (+9.4%) and Target (+9.9%) were solid, boosted by very strong
online growth, although total sales (Kmart +3.7%, Target -2.2%) were adversely
impacted by government-mandated store closures in Melbourne.
- We increase FY21F group underlying EBIT by 6% to A$3,033m.
- Our target price rises (login to view updated target price) and we maintain our Hold rating.
Bunnings and Officeworks were the key highlights
Bunnings delivered total sales growth of 25.2%, which was well ahead of our 12.7%
forecast for 1H21 driven by continued growth in both consumer and commercial
segments. Consumer sales have been particularly strong as customers undertook
projects around the home.Officeworks’ total sales was also better than we expected, with
growth of 23.4% versus our 12.0% forecast.
Technology and home office furniture
demand has been strong. However, margin has been impacted by adverse sales mix with
the lockdown in Melbourne disproportionately affecting sales in higher margin categories
such as office supplies and print, copy & create.
Kmart Group was adversely impacted by lockdowns
The performance of Kmart (total sales +3.7%) and Target (-2.2%) was broadly in line with
our forecasts driven by continued growth in home, active and kids categories, partially
offset by lower demand for apparel products.
38 Kmart stores and 32 Target stores were
temporarily closed in Melbourne, impacting sales, but this was partially offset by very
strong online growth. During the period, 15 Target stores were converted to Kmart stores
with management advising that early customer feedback, transaction volumes and sales
have been very encouraging with initial results from converted stores exceeding
expectations. Catch continues to experience strong growth with sales up 114.4%.
Industrials off to a good start
Management advised that in WesCEF, demand for ammonium nitrate has been resilient
while in Industrial & Safety, Blackwoods has benefitted from growth in sales to major
customers and strong demand for safety and hygiene products. Demand from oil & gas
and general manufacturing however has been weaker. COVID related costs of ~A$23m
were incurred during the period with WES expecting costs to run at ~A$15m per quarter
while the threat of COVID persists.
Maintain Hold rating
On the back of updates to earnings forecasts our equally-blended (PE, SOTP, DCF) target
price rises (login to view updated target price). We continue to see WES as a long-term, core
portfolio holding with a diversified set of businesses, strong balance sheet and
experienced management team.
However, trading on 27.3x FY21F PE and 3.2% yield we
see the current valuation as full. We may look to become more positive on the stock on
share price weakness.
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