Four reasons brokers like Wesfarmers

Wesfarmers (ASX: WES) – Dubbed one of the big sectoral “COVID winners,” consumer staples stocks had an easy path through the pandemic and its forced lockdowns. While businesses across the country were forced to shut up shop, grocery chains, supermarkets and a few essential retailers were given the all-clear to remain open, but with conditions. Discretionary retailers were all forced to close.

Wesfarmers, however ,applied for an exemption and was able to keep its Bunnings stores open for “tradies.” Kmart, Target and Officeworks, were mostly closed during lockdown, but could operate a click-and-collect model. Wesfarmers’ businesses such as Bunnings, Officeworks and Kmart all traded safely under the lockdown laws. While all already had an online offering, Bunnings was forced to invest rapidly and improve its service.

Having a free pass during the pandemic and through lockdown has definitely given Wesfarmers and Coles (ASX:COL) a leg-up, especially at a time when consumer spending on home improvement projects, homewares and work-from-home needs is at an all-time high. But WES’ fortunes don’t stop there. The company is a diversified conglomerate of businesses: it owns a multitude of essential brands including Bunnings, Target, Kmart and Officeworks, but also owns online bargain retailer Catch.com.au; and the group holds energy assets, as well as chemicals and fertiliser businesses. It recently bought the Mt Holland lithium project in Western Australia.

Wesfarmers posted a bumper six-month result to December 31, with EBITDA up 12% and sales revenue up 8%, but what are the brokers saying about Wesfarmers? There is one ‘outperform’ rating, two ‘sells’ and four ‘neutral’ recommendations.

• Macquarie has an Outperform recommendation, with a target price of $56.60. The broker has conducted a review on the Consumer Staples sector following January’s ABS retail sales figures. The data has household goods rising 20% year-on-year and online sales at 9.1%. With retail spending and a booming property market likely to hold up, an Outperform rating is retained.
• Citi has a Sell recommendation with a target price of $45. The broker has noted Wesfarmers’ strong result supported by a “buoyant” retail environment, with Kmart being the highlight. Citi expects these conditions to flow through to the second half, with ongoing consensus upgrades. Wesfarmers has gone from having $2.3 billion in net debt to a $900,000 net cash position. Going forward, however, the broker thinks it’s time to sell, as both ongoing retail strength and capital management expectations are already factored-in.
• UBS has a Neutral recommendation with a target price of $51.70. The broker notes the strength of 1H earnings with positive cash flow, but expects this positive momentum to partially moderate by FY22. No capital management is imminent as WES is OK with holding a large net capital balance. Neutral recommendation maintained.

And there you have it, three distinctly varying broker ratings, but with one thing in common; all three brokers agree that the positive momentum in the retail sector will flow on into the second half, but at a slightly lower rate. And all agree that Wesfarmers has done extremely well.

Wesfarmers is widely considered as being one of Australia’s modern-day success stories, having acquired, built and sold a diverse array of businesses since its foundation in 1914. The stock provides long-term investors with a nice combination of dividend yield and capital growth, through the excellent combination of monopolistic assets and growth opportunities. Wesfarmers is cashed-up and ready, and it wouldn’t be a surprise if the Perth heavyweight announced M&A activity. All in all, the company is by no means cheap, but the retail sector is booming, Wesfarmers is debt-free, and a very well-led company.

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.