ASX:WES

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.

Wesfarmers

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.

Wesfarmers

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.

Wesfarmers

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.

Wesfarmers

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.

Wesfarmers

Wesfarmers (WES) has agreed to sell its Curragh coal mine in Queensland to US miner Coronado Coal Group for $700 million plus a value share agreement.

We suggest the company is likely to reduce borrowings to some degree, as earnings have been reduced, and subject to franking credits may return capital to shareholders.

We believe a reasonable strategy is to sell $45.00 June call options for $1.02 credit and expect to keep exposure to the $1.03 dividend declared on the 20th February.

Wesfarmers

In their quarterly report released today, Wesfarmers announced that sales growth in their food and liquor area continues to disappoint.

The owner of Coles reported that food and liquor sales grew by only 0.4% in Q1 2018, which is down from last year’s 1.8% gain. In addition, lower fuel sales has also slowed convenience store sales growth.

On a brighter note, the report showed continued strong performance from its Bunnings, Kmart and Officeworks chains.

Bunnings total sales growth was 11.7%, Kmart lifted 4.9% and sales at Officeworks rose by 7.8%

Shares of WES are down over 2% to 41.80 in early trade. We see the next key support level in the low $40.00 range.

Wesfarmers

Wesfarmers reports 1Q FY18 sales on 25th of October and industry feedback suggests that Coles is not executing as well as it was and is losing market share back to Woolworths.

We expect 10% growth from Bunnings and Coles to deliver flat or low single digit growth.

FY18 forecast revenue is $70b, EBIT $4.3b with net profit after tax of $3 billion.

EPS $2.60 and DPS of $2.35 places the stock on a forward yield of 5.5%. We see relatively flat earnings for the conglomerate over the next 2 – 3 years.

Buying WES and selling an at the money European call option will provide investors with access to the dividend, franking credits and an additional 6% per year of income, on top of the 5.5% dividend yield.

Wesfarmers

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.