Wesfarmers – Downside Risks

Wesfarmers remains under Algo Engine sell conditions and we’ll review with interest, the upcoming earnings result on the 27th of August.

We expect earnings to be flat on the same time last year, once adjusted for the demerger of Coles. Bunnings and Officeworks will provide high single-digit growth and the department store sales are likely to remain weak.

In a soft market, we may see a discounted entry-level into Wesfarmers, near the $35 price range.  Remain patient!

Wesfarmers – Opportunity Approaches

Wesfarmers is currently under Algo Engine sell conditions and the recent sell-off from $38.80 may soon see a new buying opportunity emerge.

The market is in the process of repricing Wesfarmers, following tougher trading conditions, which were highlighted during the strategy day presentation.

The earnings update included downward guidance to the department store division and general headwinds across a number of the Wesfarmers businesses. Investors also need to consider the supply chain investment and system upgrades, as capex spending is set to increase.

We anticipate an overreaction to the sell side and therefore, a buy opportunity may soon approach. Keep Wesfarmers on your radar and watch for the next Algo Engine buy signal.

Wesfarmers trades at 21x earnings and on a 4% yield. EPS growth should remain around 4 -5% and we see support for the share price at $34.00




Wesfarmers – Income Strategy

Wesfarmers has made a takeover bid for Lynas.

Lynas Corporation, Ltd. is an Australian rare-earths mining company, listed on the Australian Securities Exchange as a S&P/ASX 200 company.  It has two major operations: a mining and concentration plant at Mount Weld, Western Australia and a refining facility at Kuantan, Malaysia.

Wesfarmers at $33 provides a low risk entry level, short term growth is limited, we therefore suggest selling a covered call to enhance the income return.

Call our office on 1300 614 002 for more detail on the derivative strategy.


Buy Wesfarmers

Our Algo Engine generated a buy signal in Wesfarmers into the ASX close on Friday at $44.40.

This “higher low” pattern is referenced to the intraday low of $43.70 posted on May 10th.

We see value for investors emerging in the $44.50 range.

Following the spin-off of Coles, look to sell covered call options to enhance the income return.



XJO – The 5941 Level Is Technical Resistance

The XJO has formed a “lower high” pattern within the existing Algo Engine buy signal structure.

The market has rallied 6% from the recent buy signal but we’re now mindful of the recent break of the “higher low” structure, as circled on the chart below.

5941 is resistance for the XJO and whilst the market remains below this level, some caution is required.

Names that remain supported within today’s broad market sell off include, AGL, CTX, GPT, WES, SCG, TCL, HSO & WOW. We remain cautious on the banks and select resource names .


Wesfarmers – Value Now Emerging

Our Algo Engine generated a buy signal in Wesfarmers following the price retracement from $51 back down to $46.

This “higher low” pattern is referenced to the intraday low of $43.70 posted on May 10th.

WES has been on our watch list with a target entry range of $45 – $46.

We now recommend accumulating the stock, with a view towards selling covered call options to enhance yield.


Add Wesfarmers To Your Watchlist

Wesfarmers at $46 looks attractive heading into the spin-off of Coles later next month.

Growth in the separated businesses will be limited, so once the spin-off is completed, investors can sell covered call options and strip-out the returns from the dividends and option premium.

Note: WES released its scheme booklet as part of the Coles demerger. The vote is scheduled for November 15th with Coles to commence trading on November 21st.


Wesfarmer Plans To Spin off Coles

Shares of WES have opened over 5% higher to $43.60 as the company announced that it will divest its Coles grocery business into a stand-alone ASX listing.

This new entity will be made up of over 800 supermarkets and bottle shops, 700 gas stations and 88 hotels.

The action will result in WES shareholders being granted shares in the new Coles business after WES retains a 20% equity holding.

This is all pending board, shareholder and regulatory approval.

WES was added to our Top 20 Model Portfolio about 2 years ago at $39.05. We would consider WES a Buy/Write opportunity at current levels.



WES continues To Fall On UK Bunnings Venture

Shares of Wesfarmers have lost over 7% this month and posted a six-month low of $40.50 yesterday.

The main drag to the share price has been the growing losses and poor outlook for their UK-based Bunnings hardware stores.

After writing off close to $1 billion on Monday, analysts have estimated that WES may have to invest another $540 million into the venture for a chance to break-even by 2022.

Over the last three years, the share price has traded in a broad range with resistance near $45.00 and investor support coming in near $39.00.

In the January 9th daily blog, we suggested selling a $45.00 June call for $1.02 to increase cash flow and keep exposure to the $1.03 dividend on February 20th.

WES has been in our ASX Top 50 model portfolio since January 2016 from $39.05. We continue to view WES as a range-bound stock and will use the derivative overlay strategy to enhance returns.