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3 reasons why the Wesfarmers (ASX:WES) share price could be a buy

There are a few compelling reasons why the Wesfarmers Ltd (ASX:WES) share price could be a buy, including its continuing Bunnings growth.
The post 3 reasons why the Wesfarmers (ASX:WES) share price could be a buy appeared first on The Motley Fool Australia. –

Wesfarmers share price

There are a few different reasons why the Wesfarmers Ltd (ASX: WES) share price could be a buy right now.

The old conglomerate has been operating for decades and it just reported its FY21 half-year result for the six months to 31 December 2020.

What businesses does Wesfarmers operate?

As a conglomerate, Wesfarmers operates a number of businesses including Bunnings, Kmart, Target, Catch and Officeworks. It has a chemicals, energy and fertilisers division. Wesfarmers also has an industrial and safety division.

How did Wesfarmers perform in the first six months of FY21?

Looking at its performance from continuing operations excluding significant items, Wesfarmers reported that its revenue grew by 16.6% to $17.8 billion.

Underlying earnings before interest and tax (EBIT) increased by 25.2% to $2.2 billion and net profit after tax (NPAT) grew 25.5% to $1.4 billion.

Looking at the underlying earnings before tax of each business, Bunnings earnings grew 35.8% to $1.27 billion, Kmart Group earnings went up 42% to $487 million, Officeworks earnings rose 22% to $100 million and industrial and safety earnings grew $30 million to $37 million. However, the Wesfarmers chemicals, energy and fertilisers earnings dropped 7.5% to $160 million.  

As a result of the performance, Wesfarmers’ board felt comfortable to grow the interim ordinary dividend by 17.3% to $0.88 per share.

3 reasons why the Wesfarmers share price could be a buy

1: Strong Bunnings performance

Bunnings is the key business in the Wesfarmers portfolio, it generates more than half of the underlying profit of the business.

In this result its revenue increased by 24.4% to $9 billion. Excluding the net contribution from property, earnings increased 39%.

Wesfarmers thinks that the trading performance is expected to continue to benefit from consumers continuing to spend more time at home. It continues to invest in its digital capabilities, broadening its commercial markets and strengthening both its in-store and online offering.

Bunnings is going through ongoing store network expansion, with five warehouses and one smaller format store under construction which is expected to open in the second half.

However, growth is expected to moderate from March as the business begins to cycle the initial impacts of COVID-19 in the prior year.

2: Recovery of Kmart Group

Kmart, and particularly Target, have struggled to deliver growth in recent times. In this result Kmart managed to grow revenue by 9% to $5.4 billion.

Wesfarmers said that good progress has been made during the half on executing the planned changes to the Kmart and Target store networks, with initial trading results from converted stores exceeding expectations.

Kmart saw lower clearance costs during the period, with an improved inventory position. Kmart has also been investing in its in-store retail technology, and developing its data and digital capabilities. Its online percentage of sales rose to 8.7%.

Perhaps most importantly, Target’s profitability improved during the half, reflecting a higher proportion of full-price sales and lower operating costs, supported by the ongoing simplification of the business. Target prioritised online growth, with online sales rising to 15.9% of total sales for the half.

Catch continues to grow strongly, with the gross transaction value increasing 95.6%.

3: Diversification

One of the differences between Wesfarmers and most other operating businesses on the ASX is that management are able to acquire (and divest) businesses across different industries.

There’s currently a focus on retail, but it does also own its industrial businesses.

Wesfarmers has also recently announced the joint approval of its final investment decision for the Mt Holland lithium project. Construction of the mine, concentrator and refinery is expected to commence in the first half of FY22. The first production of lithium hydroxide is expected in the second half of the 2024 calendar year. Wesfarmers’ share of capital expenditure for the development of the project is estimated at approximately $950 million.

Valuation

The Wesfarmers share price is trading at 28x FY21’s estimated earnings according to Commsec.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post 3 reasons why the Wesfarmers (ASX:WES) share price could be a buy appeared first on The Motley Fool Australia.

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