Citi tips Wesfarmers (ASX:WES) share price to dip 16% following API deal

Wesfarmers has been hit with a sell rating…

| More on:
Scared, wide-eyed man in pink t-shirt with hands covering mouth

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Wesfarmers Ltd (ASX: WES) share price has been a positive performer in 2021.

Since the start of the year, the conglomerate’s shares have risen 16% to $59.84.

Investors may now be wondering where next for the Wesfarmers share price, particularly given the recent announcement of the acquisition of Australian Pharmaceutical Industries Ltd (ASX: API).

Is the Wesfarmers share price heading higher?

Unfortunately for shareholders, one leading broker doesn’t expect the acquisition of the Priceline pharmacy chain operator to lift Wesfarmers’ shares.

In fact, the team at Citi believes the company’s shares can still tumble meaningfully despite this agreement.

According to a note from this week, the broker has retained its sell rating but lifted its price target slightly to $50.00.

Based on the current Wesfarmers share price, this implies potential downside of over 16% for the company’s shares.

What did the broker say?

While Citi expects the deal to give Wesfarmers’ earnings a small boost, it isn’t enough for a more positive rating.

Citi continues to believe that the Wesfarmers share price is overvalued based on current multiples.

It commented: “Wesfarmers has entered a scheme implementation deed with API at a $1.55 per share acquisition price, net of dividends declared. The transaction is set to be completed by first quarter calendar year 2022, subject to shareholder, court and ACCC approval. Given Sigma has dropped their bid and the relatively lower concern over competition regarding a Wesfarmers owned API, we view the transaction as likely to go ahead and therefore factor the new business into our model for Wesfarmers.”

“Contribution from API is expected to lift EPS by ~1.5% from FY22e onwards with no synergies expected. We lift our Target Price by 2% to $50.00 per share but remain Sell rated on valuation basis. At 27.9x FY23e earnings, Wesfarmers is trading on ~15% premium to the market ex-resources,” it concluded.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Broker Notes

A doctor appears shocked as he looks through binoculars on a blue background.
Broker Notes

Goldman Sachs gives its verdict on the CSL share price

Where next for CSL's shares?

Read more »

A man in a business suit scratches his head looking at a graph that started high then dips, then starts to go up again like a rollercoaster.
Dividend Investing

‘Misunderstood’: Expert names dividend ASX share to buy now at price dip

Reliable income producers aren't easy to find. Here's a stock that is cheap enough to pick up at the moment…

Read more »

A business woman looks unhappy while she flies a red flag at her laptop.
BNPL shares

Top broker warns that the Zip share price could sink 43%

Are Zip's shares heading lower from here?

Read more »

A woman in a bright yellow jumper looks happily at her yellow piggy bank representing bank dividends and in particular the CBA dividend
Bank Shares

Is the CBA share price a buy after the bank’s FY22 results?

Is now a good time to buy CBA's shares?

Read more »

Three people run in a race through deep mud and puddles of water.
Investing Strategies

3 rising ASX shares to buy that have passed the bottom: expert

Grab these recovering stocks before they become even more expensive, says Michael Gable.

Read more »

Happy couple at Bank ATM machine.
Bank Shares

Is the Bank of Queensland share price a smart ASX 200 bank buy?

Is this regional bank an underrated pick in the sector?

Read more »

A man looks sadly away from his computer screen as he holds a slice of pizza in his hand with an open pizza box in front of him on his desk.
Consumer Staples & Discretionary Shares

Is it a problem for shareholders that Italians don’t like Domino’s Pizza?

The pizza chain appears to have fizzled out in Italy.

Read more »

Red buy button on an apple keyboard with a finger on it representing asx tech shares to buy today
Broker Notes

Top brokers name 3 ASX shares to buy today

Brokers are feeling bullish about these ASX shares...

Read more »