Lithium the only drag on a positive Wesfarmers result

This $70 billion market cap firm is one of Australia’s top 10 largest companies and is also among our best-known and most successful conglomerates. Wesfarmers (ASX: WES) formally sits in the consumer discretionary sector, with hardware icon Bunnings the group’s biggest revenue generator. But it runs several other well-known businesses, not only in retail but also stretching across chemicals and fertilisers, industrial operations, healthcare and more.

The Mt Holland hard-rock lithium project in Western Australia, which Wesfarmers owns in a joint venture with SQM, sits within the group's chemicals business unit. 

The only dull spot in an otherwise stellar result, "this segment hasn't done as well as it should, down 46% in the half due to lower commodity prices," says Kai Chen, a senior advisor at MPC Markets.

But he also emphasises that because this business comprises only around 5% of total group revenue, this weakness is certainly not a disaster for Wesfarmers.

Under the stewardship of a management team that many believe ranks among Australia’s best, Wesfarmers’ diversification has served it well over the years. It has also proven resilient to the tougher economic climate of the last 18-plus months, with the share price up more than 30% since the first RBA rate hike of mid-2022.

To find out more about the result and the outlook more broadly, MPC Market's Chen provides his insights below.

Key results

• Revenue of $22.67 billion, up 0.5% from $22,56 billion in 1H2022.
• Earnings before interest and tax: $2.19 billion, up 1.6% from $2.16 billion a year earlier.
• Net profit after tax of $1.43 billion, up 3% on the first half of FY22.
• Basic earnings per share (cps) of 125.8c/share, up 2.9% from 122.3 in the prior corresponding period.
• Operating cash flow of 2.89 billion, up 47% from 1.97 billion a year earlier.
• Interim ordinary dividend (fully franked) of 91 cents a share, up 3.4% from 88 cents a year earlier.

For more information and market data on Wesfarmers head to Market Index.

Note: This interview took place on Thursday 15 February 2024.

1. In one sentence, what was the key takeaway from this result?

For Wesfarmers, consistency is key – they just consistently deliver strong results year-on-year and keep performing.

2. Were there any major surprises in this result that you think investors should be aware of?

Bunnings is the largest part of the business, but Kmart has seen the biggest growth within the last year, and it was more of the same over the last half-year. With the cost-of-living pressures, people are switching to lower-cost goods and seeking value. So, Kmart’s Anko brand has done very well, and we’ve seen the business grow its profits quite well over the last year.

Management was also straightforward in talking about what was not working. As we all know, lithium spodumene prices have fallen some 80% in the last year – which means Wesfarmers’ chemical segment hasn’t done as well as it should. This fell 46% year-on-year in the first half of FY2024, predominantly due to lower commodity prices including lithium.

In terms of their online segment, Catch also hasn’t done very well – but I think the acquisition of that business was for other purposes such as the data advantages it brings, which might be useful down the track.

3. Would you buy, hold, or sell this stock on the back of this result?

Rating: HOLD

We don’t hold it right now, having sold it six or seven months ago. And that’s just because the valuation is a little too high. But if you do have it in your portfolio, I think it's a great hold – it's a solid company, it's going to consistently perform, and it pays out a dividend yield as well.

But if you don’t, I would wait for a pullback in Wesfarmers’ share price to get better value out of the stock.

4. What’s your outlook on this stock and the sector over the year ahead? Are there any risks investors should be aware of?

We’re quite defensive, especially with the consumer discretionary sector, with a negative outlook in the broader sense. But we've seen other retailers also do very well, for example, JB Hi-Fi (ASX: JBH). However, the retail sales figures that came out a month ago were poor versus expectations, so we believe consumer discretionary stocks will drop off a bit within the next couple of months.

That said, if there's an economic downturn, I think Wesfarmers could benefit quite a lot because so much of their product line is in the low-end, budget area. People are switching from more luxury, higher-end brands, and larger purchases to those sold by firms such as Kmart.

In terms of risk, it’s only around the lithium space and the potential for stronger underperformance from Wesfarmers’ chemicals business. Though that only comprises around 5% of total group revenue, so it’s not a huge issue. Overall, it’s a positive outlook for Wesfarmers - it’s just a solid company, with a low debt-leverage ratio and a lot of operating cash – they just keep performing.

5. From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or cautious?

Rating: 4

Across the ASX 200, I’d say it’s overvalued, though some specific stocks and segments offer some value. We think there's potentially a correction coming within the next couple of months.

Over Christmas, it rallied quite substantially – though not as much as the US – but we're starting to see some cracks. For example, yesterday we had a down day with inflation coming out. The main topic of conversation is interest rates, everyone was expecting rate cuts in the US by March this year, which now looks very unlikely to happen and potentially could move further down the track into this year. That’s the kind of catalyst that can make the market rethink itself.

Where the market is now, I think it's expensive. I think if there was a likely correction to come within the next couple of months, it would be on that theme, where rates are higher for longer.

>>Read the announcement – Wesfarmers 1H24 results 
>>View the presentation – Wesfarmers 1H24 results

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