Thumbs Down For WES

Sydney, Aug 22, 2008 (ABN Newswire) - Hmmm, went investors yesterday as they studied the annual figures of Wesfarmers, 'this is not good, it's really a resources company with all these other bits attached to it, including Coles"

The company said earnings in the 2008 year climbed 33.6% on 2006-07 to $1.05 billion, thanks to the acquisition of Coles and strong performances from its coal business, as well as Bunnings, energy, industrial and safety, and chemicals and fertilisers divisions.

But that was well under market consensus for a result of $1.18 billion, according market consensus, and a high $1.210 billion for Goldman Sachs JBWere, so down went the shares, plunging $1.65, or more than 4.7% to $32.90.

The shares fell after the results were released late morning. They touched a day's low of $32.76.

Wesfarmers declared a final dividend of $1.35, taking the total for the year to $2 a share, down from $2.25 in fiscal 2007. But that was on capital expanded significantly by the Coles buy.

Wesfarmers said the outlook was for continuing "solid performances" across most its businesses, with earnings for the 2009 financial year "particularly strong". But that will reflect 9 months contribution from higher coking and thermal coal prices for its Queensland and NSW mines.

There was no mention of the other businesses looking forward to 'strong' results in the coming year.

"Overall, the businesses we owned for the full year recorded a 15% increase in revenue and 16% increase in earnings before interest and tax," managing director Richard Goyder said in a statement.

Revenue during the 12 months to June 30 climbed 244% to $33.58 billion. That's with the $16 billion in sales from Coles.

Wesfarmers forecast for its retail divisions is mixed, with continued sales growth expected for Bunnings, moderate sales growth expected for Officeworks and an accelerated store refurbishment program at Target expected to affect profitability.

The company said it would continue to lay the foundations for improved performance of Coles, which was in the early stages of its five-year turnaround.

"The changes won't suddenly be obvious on a particular day or date, but I continue to strongly believe that the results of progress made to date, and the strategies being planned, will deliver value to our shareholders and our customers," Mr Goyder said.

The outlook for the company's coal division is more bullish, with Wesfarmers forecasting earnings to increase "significantly" this year after record contract coal prices.

The Coles business generated revenue of $16.9 billion, up 7.2%, while earnings before interest and tax totalled $474 million before charging $101 million of non-trading items related to redundancy and other restructuring costs resulting from organisational change and store network initiatives.

That emphasises the huge task in front of Wesfarmers.

For all that nearly $17 billion of sales, the huge Coles business couldn't get to half a billion of EBIT, while the still growing Bunnings business had an EBIT of $589 million on sales of $5.4 billion.

Food and Liquor sales grew by 4.2%, with growth in all categories except fresh produce, which was impacted by price deflation in the fourth quarter.

Woolies' top line growth for the year was 9.9% (with inflation of 2.9%. it to reported slowing food price inflation in the quarter because of falling fruit and vegetable prices).

Comparative store sales growth in Food and Liquor for the ownership period was 2.8%; that was well under the effort at rival Woolies where comparative sales growth was 6.3% for the full year.

Wesfarmers said since its acquisition of Coles, food and liquor sales had begun to show signs of improvement.

"Market share has been stabilising as a result," it said and there was a "focus on realigning the network commenced including the development of 17 new supermarkets, 42 new liquor stores, four hotels, and eight convenience stores during the ownership period.

"In addition, 12 supermarkets, 99 liquor stores, 27 hotels and 31 convenience stores were extended or refurbished.

"In an initial start to much needed reinvestment in stores, a programme of minor refurbishment was carried out on 266 supermarkets. The total network of stores as at 30 June 2008 comprised 750 supermarkets, 767 liquor stores (including 52 large format stores), 95 hotels and 619 convenience stores.

Wesfarmers said while there are challenges ahead to turnaround Coles over the coming years, strategies are now underway to revitalise the business.

"While retail markets are becoming more challenging as household budgets come under pressure and consumer confidence softens, these actions are collectively designed to lay the foundations of change and a sustained improvement in performance," it said.

Wesfarmers said its industrial and safety division is expected to continue to strengthen its competitive position and deliver "strong results", while the resources sector is expected to be "favourable" to its chemicals and fertilisers business.

The company said it's the underwriting performance of its insurance business is likely to be constrained in the short term by competitive pressures, but is expected to make further bolt-on acquisitions.

"We've seen excellent results across a number of our divisions: Bunnings, Energy, Resources, Industrial and Safety, and Chemicals and Fertilisers.

"Overall, the businesses we owned for the full-year recorded a 15 per cent increase in revenue and 16 per cent increase in earnings before interest and tax.

"The results are pleasing given a tightening economy and the Varanus gas outage which curtailed our Western Australian energy and chemicals operations in June.

"Bunnings has again had a great year, with cash sales up 13.9 per cent on the previous 12 months, and earnings before interest and tax rising 11.6 per cent.

"This impressive result reflects good merchandising and operational strategies as well as the ongoing expansion of the Bunnings store network."

Trading revenue for the home improvement business increased by 12.6 per cent and total operating revenue (including property transactions) increased by 8.5 per cent to $5.4 billion for the full-year.
Earnings before interest and tax of $589 million were 11.6 per cent higher than those recorded last year.

Trading earnings before interest and tax (excluding property, Houseworks and other non-trading items) increased by 16.8 per cent.

"Our coal operations have benefited from strong prices. The Resources division achieved an overall 25 per cent increase in earnings before interest and tax on last year to $423 million.

"Operating revenue from the Resources division increased to $1.3 billion, 15.6 per cent above last year's.

"Earnings before interest and tax of $423 million were 25.1 per cent higher than the $338 million earned last year due largely to higher export coal sales prices during the fourth quarter.

"Earnings will increase significantly due to record export prices during the 2008/09 financial year, underpinned by strong export market fundamentals and customer demand.

"Metallurgical coal sales from the Curragh mine are expected to be in the range of 6.5 to 6.9 million tonnes for the full-year subject to mine operating performance and infrastructure constraints.

"Revenue from our Chemicals and Fertilisers division rose 68 per cent on the previous financial year, underpinning record earnings before interest and tax of $124 million.

"Our Energy division recorded earnings before interest and tax of $90 million, up 20 per cent. Industrial and Safety recorded earnings growth of 13 per cent.

"The Insurance division achieved growth in operating revenue to $1.6 billion with solid support from targeted market sectors. Earnings before interest, tax and amortisation was $145 million.

"This compares with the previous corresponding period when revenue was $1.4 billion with earnings before interest, tax and amortisation of $130 million."

Coles is a work in progress for WES and the share price will reflect that doubt.


 

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