Our largest conglomerate is facing an identity crisis post the demerger of its Coles supermarket chain. This could be driving Wesfarmers Ltd (ASX: WES) share price lower as the company could struggle to fit into the mould of a growth or income stock. The WES share price crashed 2.6% to a six-month low of $44.96 in late trade – significantly underperforming the broader market with the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index shedding 0.3% of its value. In contrast, the Woolworths Group Ltd (ASX: WOW) share price is down 1.2% to $28.82 while the Metcash Limited (ASX: MTS) share price…
Our largest conglomerate is facing an identity crisis post the demerger of its Coles supermarket chain.
This could be driving Wesfarmers Ltd (ASX: WES) share price lower as the company could struggle to fit into the mould of a growth or income stock.
The WES share price crashed 2.6% to a six-month low of $44.96 in late trade – significantly underperforming the broader market with the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index shedding 0.3% of its value.
Wesfarmers told shareholders at its annual general meeting that it was under no pressure to make an acquisition to fill the earning hole as it undertakes Australia’s largest demerger on record.
The Coles supermarket chain will trade as a separate ASX-listed entity from next Wednesday and Citigroup estimates the newest S&P/ASX 200 stock would be worth $14.20 per share, which implies an enterprise value of $20.5 billion and a 10% discount to Woolies.
The carve-out will leave Wesfarmers with an under-geared balance sheet with around $500 million in debt compared to its $33 billion enterprise value.
This means the parent will have plenty of firepower to do takeover deals and while management is publicly stating it will take its time to look at targets, the market knows the pressure will build if this process takes too long as Wesfarmers doesn’t have any other growth levers to pull.
Its Bunnings home improvement chain is facing a challenging two years in the wake of the property slump, while its retail outlets Target and Kmart are also facing an uncertain future on volatile consumer sentiment and the growing online shopping threat.
What’s more, some brokers believe Kmart has reached peak margin and the discount department store could face a margin squeeze going forward.
It’s hard to see how any of the remaining businesses under the conglomerate can satisfy growth investors while its dividend yield could also leave income investors wanting.
Wesfarmers may be able to cough up a yield of around 4% in FY20 and that’s ok but nothing to get dividend-seeking investors excited about, particularly given the cyclical nature of its earnings.
You can also forget about any large capital returns that could rival those undertaken by BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) as Wesfarmers will want to keep the powder dry as it “leisurely” hunts for targets.
This means the only way management can win the affection of investors is to make a sizable earnings accretive acquisition – and punters will be making plenty of predictions on potential targets in the coming weeks.
Let the fun begin!
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. 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 Scott Phillips.