Given the number of diversified business units which make up Wesfarmers, we believe the most accurate method of share valuation is to look at performance of the sum of the businesses.
At this point, the valuation equation can be reduced to a simple question: Will the increased revenue from higher coal prices offset the loss of market share that Coles has given up to Woolworth’s?
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We expect the resource division to generate first-half EBIT of $135 million, which is in the lower part of the $135-$140 million guidance band. Conversely, we have downgraded Coles’ sales growth which reflects industry checks suggesting Woolworth’s won the the Christmas-period grocery trade.
2017 forecast $69 billion, EBITDA $5.5 billion, net profit $2.8 billion, which will produce EPS of around $2.40 reflecting underlying growth of 5%. This places the stock on a forward P/E of 16X and a dividend yield of 5.5%.
