Wesfarmers looks for non-energy boost

The announcement last week by Wesfarmers Ltd of a $447.5 million half-year net profit wasn’t enough to deter industrial analysts from pointing to a lack of growth in the diversified industrialist’s non-energy divisions.

Wesfarmers said its energy division, namely coal, had boosted the first-half result due to higher export prices and increased production volumes.

However, the good news was thwarted by questions from industrial analysts concerning the profit growth in the other Wesfarmers businesses. This caused the company’s share price to fall from its opening price of $38.40 to a close of $36.70 on the day of the announcement, a fall of 4 per cent.

Stateone Stockbroking industrial analyst Robert Huth said the large jump of 57.3 per cent in Wesfarmers Energy’s earnings to $814.4 million was a result of a ramp-up in coal production.

“The energy division is holding up the group at the moment and that is where the worry lies in the market,” he said.

In the longer term, Mr Huth said, the coal price was likely to fall, ultimately affecting Wesfarmers Energy, while the company’s other divisions, including hardware and chemical and fertilisers, were likely to grow.

At the press conference following the half-yearly announcement, Wesfarmers managing director Richard Goyder said the tough domestic environment had affected the company’s non-energy divisions including retail, industrial safety distribution and insurance.

“Although headlined earnings [for Bunnings] of $220.9 million were marginally under the same period last year [2.0 per cent lower], when you adjust for the cost of the employee share plan for this year and its investment in store upgrades, then underlying earnings were up 6 per cent,” Mr Goyder said.

“Second-quarter sales performance was pretty strong. Store-on-store growth for the second quarter was 4 per cent.

“At the November briefing day it was about 1.1 per cent in the first quarter, so a good lift in sales at Bunnings for the second quarter.”

Patersons Securities industrial analyst Robert Gee echoed Mr Goyder’s views with an outlook of steady growth in Bunnings, but said he expected industry and safety and insurance divisions would remain flat.

“If it hadn’t been for the strong energy result then the half-year profit result would have looked a little ordinary,” Mr Gee told WA Business News.

“They have had a strong balance sheet and some time over the next two to three years they’ll come up with another acquisition.”

Bunnings store development activities were ongoing in the period with the opening of two new warehouses in Victoria and one in each of Queensland and Western Australia. Bunnings expects to open nine new warehouse-style outlets in the second half of this financial year.

Mr Goyder said CSBP’s total earnings were down 8.2 per cent to $26.7 million as a result of its Queensland Nitrates joint venture, with CSBP’s returns on the investment lower than last year’s and below expectations.

“Insurance is back because we had a higher level than we would have liked in crop claims for Wesfarmers Federation Insurance and strengthening [of] our provision in Lumley General (Australia),” he said. “Industrial and safety has gone back a bit. A fair bit of that is to do with the impact of expanding the employee share plan.”

Mr Goyder said the outlook was also positive for Wesfarmers Energy, with work on the North Curragh mine continuing and a 22-kilometre conveyor expected to be completed later this year.

“Although we won’t get the previously stated target of seven million tonnes of export coal this year, we are reasonably confident of getting 6.4mt to 6.8mt range and that we will be operating around the 7mtpa export production from next financial year,” he said.

“They are the things we can control. What we can’t control is export prices.”

But Patersons’ Robert Gee remained positive about coal prices.

He told WA Business News that commodity prices were unlikely to fall as Japan bought into the Australian market, maintaining further profit growth for Wesfarmers Energy.

Mr Goyder said Wesfarmers’ balance sheet was in good shape with regard to potential capital expenditure.

“Gearing in our net debt to equity has increased a bit but is still in our target range; our cash interest cover of 13 times is obviously very strong,” he said. “The capital expenditure (CAPEX) in the first half was around $300 million, slightly less than we anticipated due to some delays in some projects.

“We expect full-year CAPEX to be closer to $775 million [compared with a budgeted CAPEX of $900 million] but [there is] still a very strong capital investment program going on throughout the group.”

Mr Goyder said Wesfarmers would use the proceeds from the $1.3 billion sale of its Australian Railroad Group (ARG) asset to Queensland Rail and Babcock & Brown to assess growth opportunities for the business through investments in productive assets.

The company expects to make $425 million from the ARG deal, which covers freight operations in WA and contracted services operating in New South Wales and Victoria, and also includes the remaining 43-year lease on the rail network in WA.

Analysts are of the collective view that, whatever happens, Wesfarmers will be sensible and patient in the hunt for future investment opportunities.

Wesfarmers Ltd said it expected annual revenue and profit for 2005-06 to significantly exceed the previous financial year.