A Soundly Managed Investment Portfolio, Coles and Coal the Kings

Coles is moving into the last lap of its 5-year recovery and the effects are evident, both in the shops and the profit results. The retail contributions to Wesfarmers' profit results have showed considerable progress, not only at Coles but across Bunnings and Officeworks and to varying degrees at Target and Kmart.

That coal prices and demand are likely to continue strongly is another positive at this well managed cash generator. Unfortunately, its exposures to rural insurance have not proved helpful lately. But that does not invalidate WES' diversified portfolio management strategy, it merely points up the value of managing and rejigging the portfolio from time to time - Your move, Richard Goyder!

Half-year Performance & Estimates - WES

Year-end June	1H12A	FY12A	1H13A	FY13A	1H14A	FY14E	FY15E
Sales, $m	29,600	57,685	30,401	59,422	31,793	62,198	63,876
EBITDA, $m	2,359	4,400	2,505	4,601	2,650	4,830	5,060
EBIT, $m	1,863	3,405	1,974	3,530	2,94	3,719	3,954
Report NPAT, $m	1,176	2,126	1,285	2,261	1,430
Adj. NPAT, $m					1,430	2,389	2,623
Reported EPS, ¢	102.00	184.00	111.00	196.00	124.00
Adjusted EPS, ¢					124.00	208.15	227.00
EPS %FY/Growth	55%		57%	7%	12%	6%	9%
Dividend, ¢	70.0	165.0	77.0	180.0	85.0	196.10	217.50
Franking, %	100%	100%	100%	100%	100%	100%	100%
EBITDA Margin	0	8%	8%	8%	8%	7.8%	7.9%
NPAT Margin	0	4%	4%	4%	4%	3.8%	4.1%
ROE, %	0	8%	5%	9%	6%
EBIT/Interest	0.0	9.4	12.0	11.6	16.48
Net Debt / Equity	0	0.23	0.17	0.23	0.21
CashFlow/Sh, ¢	200.0	300.0	200.0	300.0	100.0	302.3	320.3
Y/E Shares, m	1,7	1,7	1,7	1,7	1,144

Notes

Data sourced from IRESS Market Technology Limited. EPS Growth compared with the pcp is shown in most columns except the first half years which show their percentage of full year EPS. In a handful of cases, unadjusted share splits, or changes between positive and negative values, may give strange changes in ratios.

Recent News Highlights

As at 19/02/2012 : see details at www.wesfarmers.com.au   (new window? Shift+Click)

16/02/2012     Results 1H12: flat overall, mixed: weak insurance, resources down, retail stores expanding, to build staff

02/02/2012     Second Quarter sales figures

17/01/2012     Insurance Division Update

17/01/2012     Quarterly Statement of Production, Development, Exploration

05/01/2012     January 2012 to March 2012 Quarter Coal Price Negotiation

30/12/2011     Completion of Premier Coal Sale

16/12/2011     Sale of Premier Coal

12/12/2011     Coregas - Bluescope Supply Agreement Negotiations

23/11/2011     Extension of Partially Protected Shares Lapse Date

09/11/2011     Chairman's address and Managing Director's address to AGM

Wave Chart

Company Overview

Company Overview - and Suggestion - Buy WESN, Not WES

Some divisional changes in revenue and EBIT in FY11 are illustrative:

Coles revenue rose from $30.0bn to $32.1bn and EBIT from $962m to $1,166m Bunings and Officeworks from $7.82bn to $8.25bn, EBIT from $802m to $882m Resources revenues rose from $1,42bn to $1.78bn, EBIT from $165m to $369m Insurance revenues rose from $1.70bn to $1.74bn, EBIT slid from $122m to $20m Kmart revenues inched from $4.02bn to $4.04bn, EBIT from $196m to $204m Target revenues slid from $3.83bn to $3.78bn, EBIT fell from $381m to $280m Industrial & Safety sales from $1.41bn to $1.56bn, EBIT from $138m to $166m Chemicals, Energy & Fertilisers $1.57bn to $1.64bn, EBIT from $196m to $283m.

For further perspective, please see the Annual Report on the website.

We draw attention to the notice on 23 November 2011, listed above: EXTENSION OF WESFARMERS PARTIALLY PROTECTED SHARES LAPSE DATE

WES extended the lapse date of its Partially Protected Shares (code: WESN) for 12 months to 23 November 2012. The Board may extend the lapse date if the average of the S&P/ASX 200 Industrials Index is less than 6,500 at the close each trading day in the two months 23 November 2012. This may be done now just three more times. The extension has no impact to the ‘cap’ and ‘floor’ prices of the WESN, which remain at $43.11 and $34.49 respectively.

So, we continue to say do not just buy WES, seek extra upside in Wesfarmers Partially Protected Shares and Buy WESN. These were issued in November 2007 to give added downside protection and encouragement to Coles shareholders (and its Board and advisers) to accept its takeover. A Coles shareholder received an equal number of WES and WESN shares.

Simply, WESN shares have the same dividend and voting rights as WES but are entitled to additional WES shares on conversion - ‘reclassification’ within a certain period – if the WES price is below certain levels at that time, on a sliding scale between the cap and floor prices. For precise details see the Wesfarmers website. At the time of writing, WES trades at $30.54, WESN at $31.09. The premium varies.