Rob Scott leads Wesfarmers out of its comfort zone

Wesfarmers Managing Director Rob Scott.

Rob Scott is breaking the mould at Wesfarmers with his potential $1.5 billion lithium move on Kidman Resources which is essentially a start-up play.

Wesfarmers traditionally has made money by buying established assets in sometimes unloved sectors and then, based on a devotion to returns on capital, run them better to establish an imposing historical rate of return of 19.3 per cent.

Shareholders are now asking whether it can do the same through Kidman.

The returns are five years away, which is a lifetime for many investors, so the risks are high.

It is also outside the main game of retail and brings to the spotlight a Wesfarmers stalwart, chemicals, energy and fertilisers division chief Ian Hansen.

Most of the analysts covering the stock are retail or fast-moving goods experts, so this one is outside their comfort zone, which adds to the confusion.

This deal is revolutionary because Kidman doesn’t make any money and won’t for around five years and even through joint venture partner SQM is the second-biggest player in the game, it is a market which is ripe for oversupply and susceptible to exaggerated estimates for demand.

A Howard Smith or Coles were investments in companies that Wesfarmers could run better but they were established players.

When boards sit around looking at the next big thing, electric cars and decarbonisation are clearly at the top of the pile but they question whether this is the game where money is made.

Some would argue you are better to invest in the unloved sectors.

Conversely, some question whether even a successful Kidman play will change the dial at Wesfarmers.

Bunnings now produces 60 per cent of the group’s earnings on 32 per cent of its capital and, if you speak to its boss (Mike Schneider), it’s only just beginning with a just five per cent share of the kitchen market and less than 10 per cent of flooring and bathrooms.

Inevitably the market will ask why Bunnings isn’t spun off given it is the real value creator in the conglomerate.

Scott is a big believer in the conglomerate but even if Kidman knocks the ball out of the park in five years time, by then Bunnings will be earning $2.5bn or more on 47 per cent returns, so will lithium really matter?

Arguably Scott has to start somewhere and on any scale a $1.5bn bet on a start-up in a global industry up against the Chinese is risky.

Some say it is still too small to move the dial, maybe, but given the grief he is copping on this deal due to lack of earnings certainty, Scott probably won’t accept the argument.

Shareholders will be hoping the Kidman and Lynas deals work out but they should be considered as just part of the story.

After shutting Bunnings in the UK, de-merging Coles and giving away coal, Scott has earned the market’s respect but, to lock that in, it’s all about his future investments.