Hi Alex,
There is justification for the sell-off, more so for WES than WOW given the composition of the WES business is now more discretionary in nature following the spin out of Coles. i.e. Bunnings which is linked to housing accounts for around 65% of earnings but Kmart is also a decent component for them accounting for around 30% of sales, but less in terms of profit, closer to 20%.
WOW on the other hand generates 92% of earnings from supermarkets so they are far less discretionary. At this juncture, two economic outcomes could play out. Inflation subsides because it was underpinned by supply chain issues or it doesn’t because it’s more embedded. In the first scenario, current interest rate expectations will prove too high and the RBA can be less aggressive. The second scenario is not as positive, with the RBA forced to raise rates aggressively even when the economy is slowing and house prices are falling. In that scenario, we would rather hold WOW than WES. In terms of current valuations, WOW is on 24x which compares to its 5 year average off 21.2x, i.e. it’s not ‘cheap’ yet, while WES is now back to its 5 year average PE of 20x, although one could argue it’s now on the cheaper side because Bunnings should be priced on a higher multiple than Coles was. We hold both, however we are more comfortable in WOW than WES at this juncture.