Wesfarmers to lift lid on sales and possible capital management at strategy day

Wesfarmers will hold its annual strategy day on Thursday, where investors will be looking for further insight into Bunnings’ recent acquisition spree.

Wesfarmers’ strategy day is likely to feature Bunnings’ opportunity in trade and bolt-on acquisitions to build out its capability beyond DIY hardware. Picture: NCA NewsWire/Dan Peled

Wesfarmers will hold its annual strategy day on Thursday, where investors will be looking for further insight into Bunnings’ recent acquisition spree that has seen it buy up bolt-on hardware businesses, as well as the possibility of a capital return.

However, analysts don’t expect an earnings forecast for its retail businesses, which take in Bunnings, Kmart, Target, Catch and Officeworks, given the heightened sense of uncertainty in the country reflected partly in the fresh Covid-19 outbreak and extended lockdowns in Victoria. It could rather provide a trading update, especially if sales momentum has changed recently.

But in a market where yield and capital returns are in hot demand, especially among retirees who are suffering from low interest rates on their cash in the bank, there will be hope for a potential capital return with Wesfarmers ending 2020 on a net cash balance of $871 million.

Wesfarmers has a history of returning surplus cash to its shareholders. In 2014 the Perth-based conglomerate made a payment to shareholders of $1 per share that equated to about $1.143 billion in investors’ pockets.

Citi analyst Bryan Raymond says in a note to clients that the strategy day closely follows the Kmart strategy day, so the focus is likely to be on sales performance over the first five months of the second half, Bunnings’ opportunity in trade and bolt-on acquisitions to build out its capability beyond DIY hardware and the willingness to recycle excess capital. Investors would like to see a capital return in the absence of a strong acquisition proposal, he added.

“We expect investors to continue agitating for Wesfarmers to recycle their very strong balance sheet position into either earnings-accretive acquisitions or capital returns, Mr Raymond said.

“Consensus forecasts currently expect lease-adjusted net debt to EBITDA to fall to 1.2 times by fiscal 2023. Citi forecasts are more conservative around earnings and working capital normalisation, but still factor in a 1.7 times lease-adjusted net debt to EBITDA ratio by fiscal 2023.”

This leaves significant scope for self-funded acquisitions or capital management relative to the 2.5 to 3 times range where investment ratings can be maintained.

“Wesfarmers has been disciplined to date on acquisitions as low funding costs result in elevated acquisition prices, while also being reluctant to return capital given a lack of excess franking credits.”

Mr Raymond said Wesfarmers could update the market on how Bunnings, Officeworks and Kmart are cycling the strong sales growth through Covid-19.

“Sales growth accelerated in April and May 2020 as home improvement, home office and essentials were in high demand.

“Wesfarmers provided a trading update on 9 June, 2020, for the five months to May 2020, so the timing of this strategy day could result in a trading update should consensus sales growth differ meaningfully from what they have experienced over the second half of 2021 to date.”

Bunnings chief executive Michael Schneider has shown an eagerness to buy up hardware and adjacent industry businesses recently – and presumably has the full backing of the Wesfarmers board – buying specialist power tool company Adelaide Tools in 2019 and in forging a deal to buy Australia’s largest tile retailer, Beaumont Tiles.

“DIY sales trends remain strong, with consumers continuing to invest in the home to take advantage of the rising tide of house prices and churn,” noted Mr Raymond.

“This is well understood by the market,” he said.