WESFARMERS (WES) – Bunnings still star of the show

Wesfarmers Limited (WES) is a diversified business whose retail brands include Bunnings, Officeworks, Kmart and Target. It also owns a chemicals, fertiliser and energy division and an industrials and safety products business.  Wesfarmers sees abundant sales growth opportunities in the core Bunnings business. There is also room to cut costs, in turn supporting operating margins and reinforcing its low-price value proposition.  In its second-largest segment, Kmart, there are blue-sky opportunities to generate export sales with its private-label Anko brand, but any earnings from that opportunity are likely to be immaterial in the medium term.  Digitisation and capturing Generation Z loyalty remain key strategic priorities for its retailing brands. We consider shares in Wesfarmers significantly overvalued compared with our unchanged $43 per share fair value estimate.  Increasing sales from trade and expanding its addressable market by broadening product categories are key to driving growth above industry rates.  Bunnings, Australia's largest home improvement retailer by sales, is targeting the commercial segment of the market to drive top-line growth. Sales from its heritage do-it-yourself business are now about 60% of the total, with 40% from commercial customers. Its ambition is to grow the commercial segment to half of sales by investing in its business-to-business capabilities. In retail, the expansion of categories like pet care and cleaning products adds to the breadth and depth of the range, with the online marketplace adding more categories, like gym equipment. In smaller stores, Bunnings aims to improve store productivity by tailoring its offerings to local markets and prioritising high-turnover products.

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