article 3 months old

Macro Pressures Tarnish Wesfarmers’ Big Day

Australia | May 31 2023

This story features WESFARMERS LIMITED, and other companies. For more info SHARE ANALYSIS: WES

Wesfarmers’ 2023 Strategy Briefing Day revealed plenty of blue sky, but rising interest rates and growing pressures on consumer spending in the short-term, won the day for brokers.

-Tough call but the economy wins the day at Wesfarmers' Strategy Briefing
-Strong growth prospects for lithium and retail
-Ammonia business on the nose
-Brokers reign in short-term forecasts, eyeing macro pressures

By Sarah Mills

Diversified conglomerate Wesfarmers’ ((WES)) 2023 Strategy Briefing Day revealed plenty of blue sky, but interest rates and growing pressures on consumer spending in the short-term clouded the view for attending analysts.

Wesfarmers CEO Rob Scott hit the headlines with “the honeymoon is over” tagline, warning investors the covid hey day was past and the likelihood of a recession was rising, sounding a clear warning for the second half of 2023. 

As a conglomerate, Wesfarmers is better positioned than most retail companies to withstand an economic slowdown, but the main question for brokers is whether strong projected returns from its lithium business will counter retreats in the retail and ammonia businesses throughout the year ahead.

The early verdict is close with the net result a fairly marginal downgrade to EPS forecasts and target prices.

Economic performance over the next six months will be critical to the company’s short-term prospects, but stockbroking analysts agreed the long-term thesis remains intact.

Strategy Outcomes In A Nutshell


No general guidance was provided or expected, although capital expenditure forecasts have tightened to the upside, to between $1.1bn and $1.2bn. Goldman Sachs described this figure as "highly efficient".

CEO Rob Scott warned of a tough-half ahead.

The company advised the ammonia pricing was disappointing, that it expected conditions to tighten for retail, and that its Mt Holland lithium project was on track to meet guidance.

While cost inflation remains a challenge, management advised productivity improvements across the board would offset this.

Citi analysts beg to differ, noting a rising costs and a delay in pass through has hit margins.

Meanwhile, lithium is expected to provide strong cash generation and balance sheet flexibility, which the company could put to good use as pressure rises on acquisition targets as the economy slows. 


Wesfarmers identified plenty of growth opportunities for retail, all of which appeared achievable.

While the discretionary retail market is about to hit choppy waters, most brokers expect Wesfarmers, with its low-cost value proposition, could well grow market share and customer numbers. 

CEO Rob Scott observes consumers are already shifting to cheaper items.

Specifically, the company targeted Bunnings commercial as a potential growth area, as well as Pets. 

Goldman Sachs considers Bunnings’ trade market to represent the most scaleable opportunity for growth. 

This broker says the company’s target of 50% of the total commercial hardware (it currently holds 37% to 38% of sales according to Macquarie) represents a $4bn opportunity and, if achieved, would imply a 16% gain for the share price. 

Macquarie, meanwhile, observes management is targeting store investment outside of its domestic Target/Kmart business.

Kmart’s Anko brand is expanding into Canada; and the company plans to expand into GenZ and beauty.

Brokers also observe Wesfarmers is late to e-commerce, which means there is plenty to be harvested once the company gains momentum. 

Onedigital continues to be a cost centre, but UBS takes heart noting losses are lower than forecast. 

Brokers generally expect growth in Kmart to offset losses in Catch.

Citi, for one, is unimpressed with the company’s strategy for Catch, and is unable to see a path to profitabity, despite narrowing losses.  

This broker considers Wesfarmer’s retail valuation to be stretched, at a 22% premium to the broader discretionary retail market and prefers JB Hi-Fi ((JBH)) and Super Retail ((SUL)).

OnePass has been posting encouraging results and now comprises 20% of Kmart delivery orders. It is soon to be rolled out to Officeworks, then Priceline.

One asset that won’t be expanding is the company’s network of Priceline Pharmacies, which is pegged for rationalisation.


Management advised that WesCEF’s  (Chemicals, Energy and Fertilisers) FY24 earnings were likely to suffer from low ammonia pricing.

Much hinges on Wesfarmers' covalent lithium projects coming on line in time (given weak ammonia pricing and growing retail pressure). Management assured this is the case. 

Morgan Stanley noted management’s expectation for a 12-18 month ramp-up to full nameplate capacity at Mt Holland and the signing of offtake agreements with tier-1 lithium hydroxide customers.

Ord Minnett estimates Mt Holland accounts for about 7% of the company’s roughly $42 target price and estimates a strong performance in lithium would generate a considerable upside kick for the company.

Meanwhile, a barney has broken out between WesfarmersCEF and the WA oil and gas cartel and the WA government.

WesfarmersCEF chief Ian Hansen has accused WA’s LNG heavyweights of failing to meet domestic gas reservation policy in the state, and has accused the government of not enforcing the policy.

If failure to enforce the policy continues, he warns downstream processing of lithium will be affected.

Resigning WA Premier Mark McGowan will no doubt be glad to be out of that stoush, leaving it to Roger Cook to step into the ring.

Hansen observes Wesfarmers' gas costs have risen from $3 a gigajoule three years ago to $10 a gigajoule.

Meanwhile, the company’s lithium projects have been sharply de-risked.

Wesfarmers’ Kwinana processing project near Perth has just signed multi-year offtake agreements to supply tier-1 customers with lithium hydroxide from its plant, which is still under construction.

Similarly, the company’s Mt Holland project recently struck multi-year deals in the region of $2.6bn. Customers include Tesla, Mitsui and LG Chem.

Now the project just has to run on time. Spodumene concentrate is expected to be produced at Mt Holland later this year, and first sales are expected in the June half of 2024.


On the health front, it’s a matter of “watch this space”.

A healthcare acquisition battle is ensuing with SilkLaser (although Wesfarmers says it will not match EC Healthcare’s rival bid), and follows on from the recent acquisition of Australian Pharmaceutical Industries (API). 

Brokers Have Their Say

Not all brokers who actively cover Wesfarmers have updated today for the 2023 Strategy briefing.

From those who have, it’s a tight call, with FNArena’s consensus price target easing a marginal -1% to $49.383 from $49.850.

UBS remains a fan, retaining a Buy rating and $55.50 target price.

Macquarie cut its target price to $52.80 from $55.60 and retains a Neutral rating.

Morgan Stanley holds fast with an Equal-Weight rate and $47.50 target price (Industry view: In-line).

Jarden retains a Neutral rating and cut its target price to $45 from $46.

Goldman Sachs retains a Sell rating and increased its target price to $44 from $43.50.

Citi retains a Sell rating and $43 target price.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms