Founded: 1914, ASX code: WES, homepage: www.wesfarmers.com.au

Overview:
Over its long and successful history Wesfarmers evolved into one of the Australia’s prime capital management conglomerates. Based in WA, it owns, operates and manages large number of quality businesses across the range of industries such as retailing (eg. Bunnings), coal and energy (eg. Curragh), insurance (eg. OAMPS), property, chemicals and more.

Analysis of latest annual report (June 2006):

• Market Cap: Depending on the daily stock price the market cap of this company is about $15.5bil in approx. 378mil of outstanding shares.
• Shareholders Equity: $3.3bil making the stock’s book value approx. $8.80 per share (7.9% growth on June 2005). From that about $555mil. ($1.47 per share) is available working capital.
• Earnings per share (excl. abnormals): $2.30 making the average EPS growth in last 3 years about 22.3%
• Return on Equity: 26%, averaging around 21% in last 3 years
• Balance Sheet: Working capital of $555mil versus total debt of $1.1bil

Sharemarket’s view:
Average WES Price to Earnings ratio of 20 suggests the share price around $46 ($2.3 EPS x 20 P/E).

GROWTH STOCK:

• Conservative forecast of average EPS growth in next 10 years: 15%
• Share price in 10 years time: about $186 (EPS in year 10 based on forecasted yearly EPS growth times average P/E)
• Total shareholders return in 10 years times: $235.4 (share price of $186 plus $49.4 of all the dividends if current payout ratio of 92% persists)
• Rate of Return in next 10 years based on the beginning of July 2007 price of about $41 per share: 19.1%pa

PROS AND CONS:
+++ High Return on Equity
+++ Stringent approach to new share issues
— Decrease in book value in both 2004 and 2005
— With ever increasing size sustaining the current ROE levels may prove difficult
— Uncertainties related to upcoming Coles takeover* (ie. significant increase in debt levels and number or marketable shares may somehow distort the value)

*During the August 2007 Wesfarmers is to take control of the second biggest Australian retailing corporation, the Coles Group. This acquisition (to be funded by $8.1 billion of new debt and issue of about 350 million new shares) will ultimately decrease the yearly EPS deep into sub $2 levels.

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This entry was posted on Friday, July 6th, 2007 at 5:12 pm and is filed under Australian stock. You can follow any responses to this entry through the RSS feed. You can leave a response, or trackback from your own site.