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Cititgroup shocks with $29.20 Wesfarmers Ltd (ASX:WES) share price target

Analysts at US investment bank and research house Citigroup have run the ruler over Wesfarmers Ltd (ASX: WES) shares after its spin off and float of Coles Group Limited (ASX: COL) and come up with a price target that may surprise some investors.

The Wesfarmers Group formally split on November 20 when Coles started trading as a seperate entity on the ASX with Wesfarmers shareholders awarded 1 Coles shares for every 1 Wesfarmers share owned under the terms of the agreement.

The Coles supermarkets group now has a market value around $17 billion, with the remaining collection of Wesfarmers’ assets now valued around $35.5 billion.

Wesfarmers’ management openly stated they wanted to de-merge Coles in order to shift Wesfarmers’ investment portfolio weighting and acquisitive growth strategy towards businesses with higher earnings growth potential.

On a pro forma basis Wesfarmers’ businesses that include Bunnings Warehouse, Kmart, Target, Officeworks, flybuys and Wesfarmers Industrials had EBIT of $3 billion on revenue of $27.5 billion for FY 2018. Net debt would have stood at $1.6 billion, with its dominant and highly profitable Bunnings business contributing just over half of total EBIT. Wesfarmers will also retain a 15% ownership stake in a Coles business that is likely to be a reliable cash-generating machine into the future.

Its net debt will have also have been effectively reduced by $4.8 billion since FY 2016 to $1.6 billion which means the group is in reasonable shape to fund acquisitions given its strong cash flows and scale.

Notably, Citigroup appears to be outside consensus with its “sell” and $29.20 share price target, compared to others in Australia’s broker community, as both Credit Suisse and Macquarie reportedly have “outperform” ratings on the shares.

Overall, given its diverse portfolio of assets including the dominant Bunnings business, Wesfarmers is likely to continue to deliver investors reasonable total returns over the long term when you factor in what should be reasonably reliable dividend payments. Evidently though it will take the market a little while to establish what exactly it sees as fair value for the shares.

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Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. 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.