The Wesfarmers Ltd (ASX:WES) share price could be going higher from here according to one leading broker. Here’s what it said…
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The Wesfarmers Ltd (ASX: WES) share price could be on the move today.
This morning a leading broker upgraded the conglomerate’s shares in response to its half year results.
On Thursday Wesfarmers released its results for the six months ended 31 December. It reported a 16.6% increase in revenue to $17,774 million and a 25.5% jump in net profit after tax (excluding significant items) to $1,414 million.
The key driver of its growth was its Bunnings business. The hardware giant reported a 24.4% increase in revenue to $9,054 million for the half. This represents over half of the company’s revenue during the period.
Also supporting its growth was a 23.7% jump in Officeworks revenue to $1,523 million, a 9% lift in Kmart Group revenue to $5,441 million, and a 6.6% increase in Chemicals, Energy and Fertilisers revenue.
According to a note out of Goldman Sachs, this was far better than it was expecting.
“WES delivered a stronger than expected 1H21 EBIT of A$2057mn +27.4% (12.3% beat vs. GSe and +10.3% versus Visible Alpha Consensus Data), primarily due to Dept store turnaround but generally solid performance across the board. Revenue grew to A$17.8bn, +0.9% vs. GSe (+3.5% vs. consensus). Group NPAT was at A$1390mn, +9.5% vs. GSe on a post-AASB16 basis and an interim dividend of A$0.88 was declared, +4.6% vs. GSe.
Where next for the Wesfarmers share price?
In light of this strong performance and its balance sheet flexibility, Goldman Sachs has upgraded Wesfarmers shares to a buy rating and lifted its price target on them by 23.6% to $59.70.
This price target implies potential upside of 9.6% for its shares over the next 12 months excluding dividends. This stretches to just over 13% if you include the fully franked 3.6% dividend yield the broker expects in FY 2021.
Why is Goldman Sachs positive?
Goldman Sachs notes that Wesfarmers is well-placed to benefit from Australia’s economic recovery. It also believes it has excess capital that could be used for earnings accretive acquisitions. It explained:
“Management noted improving confidence in the economic recovery in their outlook statement, which is a notable improvement on prior cautious commentary from the company. Kmart turnaround and Bunnings property cycle exposure suggest WES is well positioned to participate in recovery as it gathers pace in Australia.”
“We have consistently highlighted in our prior research that WES has excess capital over and above its A-/A3 credit rating requirements. The beneficial cash conditions experienced by discretionary retailers currently has exacerbated WES’ balance sheet position, with the company now demonstrating what we consider to be an excessive capital position with an estimated >A$8bn in excess of credit requirements, prior to the Mt Holland development. We revise FY21/22 NPAT forecsts by +16.3% and +21.9% respectively.”
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.