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WES has reported a slightly better-than-expected 1H17 result, with EBIT of $2.4b.

Coles’ earnings were disappointing, declining by 2.6% on headline basis or 6% after adjusting for one-off property sales. At a group level, the strong result from the industrial division and Bunnings off set the weakness in Coles.

With Coles accounting for 40% of earnings, we believe group earnings growth will be moderate (3 – 4%) and full value for the stock is $40 – $43.

FY18 we assume revenue of $71.b, EBITDA of $5.9b, Net Profit $3.1b, EPS of $2.70 and DPS of $2.10 placing the stock on a forward yield of 5.5%

With the above in mind, we are selling covered calls over WES and a combination of the dividend and option premium is generating 10 – 12% annualized cash flow.

Wesfarmers‘ officials have credited their conglomerate structure for a 13.2% increase in half-year net profits to $1.57 billion. This result was well above the street’s expectation of $1.47 billion.

The company announced it will increase its interim dividend to $1.03 from 91 cents, payable on March 28th. Wesfarmers’ revenue grew by 4.3% to $34.9 billion, and EBIT were up 15.1% to 2.42 billion.

The strongest results from the conglomerate came from the industrial division, where earnings rose from $22 million to $377 million, largely from the $256 million turnaround in resources as coal prices moved higher during the quarter.

On the other side of the ledger, Coles’ same store sales grew by 1.3%, but lower prices meant revenue from the supermarket remained steady and earnings fell 6.8% .