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

Wesfarmers has been hit with a sell rating…

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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.

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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.

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