Wesfarmers: Focusing on data, digital and value

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
03 June 2022, 10:00 AM
Sectors Covered:
Industrials

  • Wesfarmers' (ASX:WES) strategy day provided insights into the growth opportunities available for each business division and the strategy going forward.
  • With cost-of-living pressures increasing, management was confident in WES’s ability to navigate through a more cautious consumer environment given the retail businesses offer a strong value proposition underpinned by scale benefits, product innovation and supply chain efficiencies.
  • There was a big focus on data and digital with information provided on the newly established OneDigital platform that will provide the retail businesses with broader insights than could be achieved on a standalone basis.
  • FY22F/FY23F/FY24F underlying EBIT changes by +2%/+1%/+2% following the inclusion of Health (API) earnings, an increase in WesCEF expectations, and adjustments to corporate costs following updated guidance for OneDigital losses.
  • Our target price remains broadly unchanged at (login to view) and we maintain our Add rating.

Bunnings should remain resilient

Management pointed to the resilience of Bunnings’ earnings over time with Australians traditionally investing in their homes through different economic cycles. The structural shift to greater working from home is a tailwind for Bunnings as it increases the need for repairs and maintenance and encourages people to do more in the home environment.

Management sees the addressable market at $100bn in 2022 vs $39bn in 2007 as Bunnings continues to expand into existing and new categories. This includes expanding the depth of range in existing categories such as room furniture & storage, garden & garden décor, and kitchen & bathroom.

Bunnings also sees opportunities for growth in in-home services, pet durables, and recreation (eg, new products for caravans and RV maintenance).

Kmart can benefit as customers focus on value

Kmart’s scale and sourcing capabilities underpin its low-cost business model, which allows it to deliver the lowest prices, driving greater demand and scale, and allows further sourcing and product development capabilities.

With value expected to become increasingly important, we think Kmart is well-placed to benefit with the average price of an item at around $6-7.

Even if price rises are needed to mitigate cost inflation, this will be small on an absolute basis (eg, a 5% increase in average selling price = ~35c) and Kmart can use its scale and supply chain flexibility to limit increases vs its competitors.

An introduction to OneDigital

OneDigital is WES’s newly created data and digital ecosystem that will incorporate OnePass (rebranded from Club Catch), Catch (marketplace and fulfillment capabilities), and OneData (shared data analytics).

While each WES division retains responsibility for its own data and analytical capabilities, OneDigital will sit across the retail businesses allowing a broader and deeper understanding of customers than could be achieved on a standalone basis.

We think OneDigital could become a powerful tool for WES given the company’s broad sector exposures and will tie in well with insights from flybuys.

Still early stages with Health strategy

WES provided a brief overview on its new Health division following completion of the API acquisition on 31 March 2022. While it is early days and the strategy is still being formed, management identified three areas of focus including:

  1. Strengthening the core through investment in product, supply chain and online;
  2. Data and digital investment to deliver a compelling omni-channel offer and leverage the Sister Club loyalty program;
  3. Product and services innovation, digital health, and M&A.

Changes to earnings forecasts and investment view

FY22F/FY23F/FY24F underlying EBIT changes by +2%/+1%/+2%. Our equally-blended (PE, SOTP, DCF) target price remains broadly unchanged at (login to view) and we maintain our Add rating.

We continue to see WES as a long-term, core portfolio holding with a strong mix of businesses, highly regarded management team and a healthy balance sheet.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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