How Bunnings could benefit from the failure of Masters

Photo credit: AS 1979

Woolworths Limited (ASX: WOW) shocked the market this morning by announcing a sale or wind-up of its failed Masters Home Improvement venture, saying that it cannot sustain the ongoing losses from the business.

At this early stage, it is unclear whether long-term shareholders will be winners from the decision or not, but there are two clear beneficiaries: Bunnings Warehouse, owned by Wesfarmers Ltd (ASX: WES), as well as Mitre 10, owned by Metcash Limited (ASX: MTS).

Indeed, Woolworths first entered into the Masters Joint Venture with its US-based partner Lowe’s in an attempt to compete with Bunnings, which was dominating Australia’s home improvement and hardware sector.

Since then however, it has pumped billions of dollars into the business as it continued to act as a drag on the group’s overall financial performance. For instance, the company reported a near $225 million operational loss (before tax) from its ‘Home Improvement’ segment (which also includes its Home Timber and Hardware business) in 2015, compared to a loss of $96.7 million in 2012 (figures from Capital IQ).

Although the business was a failure as far as the group is concerned, it has experienced strong sales growth which more than doubled between 2012 and 2015, and rose almost 24% in the 2015 financial year to $930 million. Upon the sale or wind-up of the business, a large portion of any sales could find their way to either Bunnings or Mitre 10’s hands.

The eventual closure of Masters will help improve the competitive position of both Bunnings and Mitre 10 in the multi-billion home improvement market, and could potentially lead to improved margins and overall profitability for them as a result.

Another way that Bunnings could capitalise on the announcement is by buying some of Masters’ sites. The Do-It-Yourself and home hardware king is understood to be interested in a number of locations currently occupied by Masters, which The Australian reported could be worth up to $40 million each. These are sites in premium locations which could provide Bunnings with a new avenue for growth, adding even more to Wesfarmers’ bottom line in the long-run.

While Woolworths’ shares surged 6.5% following the announcement, Wesfarmers’ share price also rose 2.8%. Personally, I believe Wesfarmers is the better buy today at $40.42 per share.

Motley Fool Pro is now open to new members

Our most comprehensive and innovative ASX investment service -- has reopened for a brief time, to accept new members. That means you've got the chance to follow along as one top investor puts $1,000,000 of The Motley Fool's own money to work...all in ASX stocks. But to get YOUR front-row seat, you must act NOW. (Please note: just 1,000 new member seats are available.)

Click here to claim YOUR invite!

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.