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Wesfarmers Profit Falls 9% due to Insurance Sale

Wesfarmers Profit Falls 9% due to Insurance Sale
Aug 20, 2015 By Imran Valibhoy

Diversified retailer and Coles owner Wesfarmers Limited (ASX:WES) announced a 9.3% slide in net profit which was mainly due to last year’s sale of its insurance division.

Wesfarmers achieved a net profit of $2.44bn compared to last year’s $2.7bn profit which was boosted by the sale of its insurance business. Excluding the one-off sale as well a non-trading items, Wesfarmers profit actually rose 8.3 per cent, which emphasises the strength and efficiency of its continuing operations.

Wesfarmers Managing Director Richard Goyder is pleased with the “solid increase in underlying profit for the year.”

Revenue increased modestly at 3.8% totalling $62.4bn compared to $60.2bn achieved in FY14. The company declared a final dividend of $1.05 slightly up from last year, however the full year distribution remained unchanged at $2 due to a special dividend last year.

Basic Earnings per share for FY15 were $2.16. Based on Wesfarmers last traded price of $40.65 the stock is currently trading at a price to earnings (P/E) ratio of 18.8, well above the market average of 15.4 and also above its main peer Woolworths Limited (ASX:WOW). Woolworths projected P/E is somewhere around the mark of 13 and somewhat reflects the elevated pessimism towards the supermarket giant.

Shares of Wesfarmers have declined roughly 10% in the past 12 months and are also slightly down year-to-date. Nevertheless, WES has significantly outperformed Woolworths which declined more than 25% in the past 12 months. Investors appear to value Wesfarmers growth outlook significantly higher as we can see at the elevated P/E ratio. The entire sector faces headwinds as investors fear that fast growing competitors such as ALDI will gain further market share. Another German discounter called LIDL is also set to enter the Australian market and will challenge both Coles and Woolworth. In order to remain competitive the supermarket giants are forced to offer more competitive prices, which is obviously positive for consumers but it eats into their profits.

As for the FY 16 outlook Managing Director Richard Goyder is confident that the Group can carry over the current momentum. He stated that “the Coles, Bunnings, Officeworks and Kmart businesses all have good momentum, with Target expected to improve as its transformation plan continues.” Whilst the company does not provide any specific guidance, the statement says that “Wesfarmers will retain a strong balance sheet to secure growth opportunities, should they arise, and where practical, optimise the portfolio.”

With an increasing amount of competition and ongoing price wars, Wesfarmers is not necessarily a stock to be bullish on. Valuations have achieved high levels and companies such Coles are under pressure to satisfy growth-hungry shareholders. Wesfarmers fully-franked dividend remains an attractive quality as it yields almost 5% at current prices and may therefore be well suitable for conservative long-term investors looking for income opportunities.

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Imran Valibhoy Author: Imran Valibhoy Aug 20, 2015

Since Joining the firm in 2006, Imran has worked on a range of M&A and Capital Market transactions in the natural resources, mining as well as projects in the renewable energy sector. Prior to joining Wise-owl, Imran worked at Euroz Securities in Perth, aiding in the advisory and valuation of companies in the mining and industrial sectors in Australia. Imran has a Masters in Banking & Finance from City University's Class Business School in London and a Bacheloor degree in Commerce from UWA.

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