Capable long-term management

WITH attention focusing on the development of a “branch office economy”, who would rate the likelihood of a Perth-based diversified industrial being a standout performer in terms of long-term TSR performance at a national level?

Wesfarmers shareholders were well rewarded by this WA blue chip, which delivered a TSR performance of 108 per cent for the year to June 30 2001.

Unlike the so-called entrepreneurs that emerged during the 1980s, Wesfarmers managing director Michael Chaney and Wesfarmers management have shown themselves to be capable, long-term managers of a range of businesses under their stewardship.

With interests ranging from Bunnings hardware retailing, coal mining, fertiliser, rural services, insurance and transport, Wesfarmers represents an exception to the general trend towards increased specialisation and the divestiture of non-core assets and activities. Comparisons have been drawn with another spectacularly successful conglomerate in General Electric.

Conversely, if you ascribe to the view that the function of a corporate head office is to allocate capital to operational business units, monitor performance and address issues as they emerge, there is no reason why a diversified approach should not be capable of delivering superior returns to shareholders.

Throughout the second half of the 1990s Wesfarmers, emerged as the under-bidder on a range of assets that would have provided an immediate fit to its existing portfolio.

Arguably the Wesfarmers share price did not fully reflect the commercial discipline of this approach in rejecting potentially value-destroying acquisitions during this period.

The Australian corporate landscape is littered with strategic acquisitions that have resulted in multi-billion dollar write-offs long after the “strategic” value of the acquisition has been diminished through changes in the underlying economics of the operating environment or sheer mismanagement.

If companies are unable to earn an adequate rate of return on invested capital, excess cash always should be returned to the hands of shareholders to seek returns elsewhere.

Wesfarmers has maintained an active capital management program throughout. The capital markets gave Wesfarmers a big tick when it announced its bid for Howard Smith Limited in June this year. With an initial offer price in excess of the proposed buy-back range by Howard Smith, the price of both bidder and target rose strongly following the announcement.

With superior performance from the Bunnings Warehouse “category killer” stores, limited geographic overlap with BBC Hardware, continued strong growth in hardware sales and, for once, an absence of ACCC and competition policy issues, the bid was always destined to succeed.

The challenge now for Michael Chaney and his management team, as for managers generally, is that the performance bar of expectations has been raised. There is still continued scope for rationalisation within a number of product markets in which Wesfarmers operates and this will pose a number of challenges for the company going forward. The irony of strong performance is that managers make the job tougher on themselves and successors. Based on performance to date, shareholders are entitled to be confident that Wesfarmers will continue to deliver.

– Trudo