The group hosted a strategy day yesterday at a significant juncture in the company’s history as they continue to shift from its heavy retail exposure to a growing portion of earnings coming from health & chemicals. Bunnings has made up the bulk of earnings since the demerger of Coles in 2018, and the company sold its final stake in the supermarket 6 weeks ago which sees the company flush with cash for capex spend and/or dividends. There remain some growth levers in retail with Bunnings looking to move into additional verticals including pet and smart home products, but much of the strategy day focussed on improving operating efficiencies across Kmart, Target, Officeworks and Bunnings with the view that the “easy money” has been made, expecting a slowdown in consumer spending. The struggling Catch business that they acquired in 2019 is also looking to slim down to grow with losses falling month on month as they reduce the number of available products and cut headcount.
The key growth areas are in health and WesCEF, though both segments face near-term issues with earnings. Wesfamers flagged softer returns in their health business as they look to transform the API business they acquired last year, investing in private label & the supply chain that is expected to reap rewards from FY25. WesCEF is also expected to be impacted by falling ammonia prices which have a lagged impact on the bottom line, likely to put pressure on earnings throughout FY24. On the flip side, their investment in Lithium is progressing well with the first ore expected out of their Mount Holland Mine and Kwinana processing facility early in CY24, on time and on budget. This is expected to produce 50kt of lithium hydroxide a year once fully ramped up, but it has come with a significant capex spend.
Overall, the strategy day showed the company is in a great position and all signs point to a strong FY23 result and dividend. While we are comfortable with the position, there may be better income opportunities given they are trading on an expected yield of 3.65% fully franked.
MM is bullish WES
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