Wesfarmers (ASX:WES) Trying to Pump up Capital Position with Divestments

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Wesfarmers
Wesfarmers

Wesfarmers Ltd.’s (ASX: WES) proposed spin-off of mechanic workshops, Kmart Tyre and Auto service, which is hit by rubber seems to be supporting the group in terms of capital management. A quick and clear transaction is expected from the bids by interested parties and Wesfarmers might receive around $300 million for this unit. The most probable buyer can be ASX-listed Bapcor, which also spoke to fund mangers about the merits of such an acquisition.

Strategic reviews of WES business, Bunnings UK and Ireland business (BUKI) have been underway and overall analysis resulted in agreement to divest Homebase, accelerating department store network optimization and target earnings improvement. Sales of Curragh for $700 million, and other key initiatives have strengthened the company’s position while it established advanced analytics centre with divisional focus on long-term value creation.

The group is thus working on a disciplined portfolio management. Its primary objective is to strengthen the existing business through operational excellence and to satisfy the customer needs. The Group earned a rating of A3 from Moody’s and a rating of A- from Standard & Poor’s that is of a stable outlook. As on date, under the Group’s ownership, over $8 billion of capital has been invested in the business across the store network, supply chain and online channel. Since 2011, Wesfarmers has added on an average 12 stores per year to its network and targets to add 10-14 net new stores per annum.

It has now completed divestment of Homebase as at June 2018. The group aims to maintain a strong balance sheet and sustainable practices like it leverages its data and digital capabilities and has an active portfolio of strong businesses with decent momentum. It makes an investment in a new platform in a disciplined manner for long-term growth. Thus, the overall aim is to deliver superior returns over time by strengthening its business development capabilities.

However, its supermarket business, Coles has not been able to mark a significant growth in terms of market share with high-end competition from Woolworths. It also recently proposed a demerger with Coles that would reposition the Group’s capital employed towards higher growth opportunities. The Group is expecting that in FY18 its capital expenditure will be around $1.3 billion but is subject to net property investment. It is expected that after a demerger of its Coles division, Wesfarmers asx will be able to focus more on its growth opportunities.

Wesfarmers’ move to divest its Bunnings UK and Ireland business was noted to be on a positive side by many market experts and shareholders. WES is divesting the business to a company associated with Hilco Capital. It is expected that WES has a strong suite of businesses, with market-leading positions and Bunnings ANZ will continue to perform very well following industry consolidation. 40 per cent of Wesfarmers earnings before interest and tax (EBIT) comes from its hardware division Bunnings (and this might go up once Wesfarmers divests Coles). While the impact from housing trend is yet to be ascertained, Wesfarmers ASX listed stock faces challenges in Supermarket segment, and would be a watch in terms of its strategies to deal with the rising competition. At $49.550 (as at market open on July 04, 2018), the stock still looks on a higher side.

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