Fundamental Financial Analysis: Wesfarmers and Woolworths Report

This report presents a fundamental financial analysis of two major players in the Australian retail industry: Wesfarmers and Woolworths. It begins with an industry overview, highlighting the Australian retail market's key trends and economic factors, followed by detailed company profiles. The analysis employs a top-down approach, examining macroeconomic indicators like GDP, inflation, and interest rates to assess the overall market environment. A future projection of the Australian stock market is also provided. The report then dives into a bottom-up analysis, including ratio analysis and a DU Pont study, to evaluate the financial health and performance of each company. Intrinsic values are calculated using the P/E model, and the report concludes with findings, investment recommendations, and a comprehensive overview of the companies' share price movements and future outlook. The report aims to provide a comprehensive overview of the financial performance of Wesfarmers and Woolworths and provides insights into their relative valuation.

Running head: Financial market and Institutions
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Financial market and institutions

Financial market and Institutions
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Contents
Introduction.......................................................................................................................3
Industry overview.............................................................................................................3
Company overview...........................................................................................................3
Company Overview..........................................................................................................3
Top down analysis............................................................................................................4
Future projection on Australian stock market..............................................................6
Industry Viewpoint.......................................................................................................6
Industry data.............................................................................................................6
Future Outlook..............................................................................................................7
Current intrinsic value of the companies......................................................................7
Wesfarmers:..............................................................................................................7
Woolworths...............................................................................................................8
P/E model......................................................................................................................8
Wesfarmers:...............................................................................................................................8
Woolworths...............................................................................................................9
Bottom up analysis...........................................................................................................9
Financial data:.............................................................................................................10
Wesfarmers.............................................................................................................10
Woolworth..............................................................................................................11
Ratio Analysis.............................................................................................................12
Wesfarmers.............................................................................................................12
Woolworth..............................................................................................................13

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DU Pont analysis........................................................................................................14
Wesfarmers.............................................................................................................14
Woolworth..............................................................................................................15
Findings..........................................................................................................................16
Recommendation and Conclusion..................................................................................17
References.......................................................................................................................18

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Introduction:
Fundamental analysis is quite required for every investor to done before investing the
amount for a longer period in the industry. For performing the fundamental analysis over a
company, an investor is required to manage all related aspect and conduct the study
accordingly. For this study, retail industry has been taken into consideration and
Wesfarmers and Woolworths limited have also been analyzed to perform this study (trading
economy, 2017).
Industry overview:
Australian retail industry falls into one of the top industry in the market. The
Australian retail industry has been studied and it has been found that the several changes have
taken place into the Australian industry from last few years. The industry had to face few
issues due to economical breakdown and few internal changes into the industry. Further, it
has been observed that Wesfarmers and Woolworths limited are biggest retailing companies
in the Australian retail industry. So these companies have been taken into consideration to
perform this study.
Company overview:
Woolworth’s limited company is one of biggest retailing companies in Australia. This
company has operated its functions into many segments which are Woolworths logistic
segment in which transportation is handled, Woolworths clothing segment in which home
ware, beauty sector, clothing etc. is handled and Woolworth food, Woolworths financial
services, , witchery group, Country road group, David Jones etc are also handled by the
company. The head office of the company is in South Africa. This company has registered
itself in 1997 in Australian market. Currently, 43000 employees are working in this company
and the company has operated its business in 14 countries all the way through 1300 outlets. It
has also been observed that approximately 40% revenue is earned by the company from
Australian market itself (Morningstar, 2017). Company has registered itself in the Australian
stock exchange to trade its shares.
Company Overview:

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Wesfarmers limited company is one of biggest retailing companies in Australia. This
company has operated its functions into many segments which are retail industry, production
industry, gas processing, coal mining industry and distribution industry and many safety
product distribution industry, fertilizers manufacturing industry, chemical industry and
investment businesses in many states such as Australia, UK, new Zealand and worldwide.
Presently, the company is performing very well into the retail industry and the main mission
of the company is to be the top firm in the industry. For meeting with the mission, this
company has diversified its business into many markets (Nelson et al, 2012). Wesfarmers
came into subsistence in 1914 and at present, its main operations are operating in Perth,
Australia. Company has registered itself in the Australian stock exchange to trade its shares.
Top down analysis:
Top down analysis is a part of fundamental analysis where the external factor of a
company is analyzed to identify the positioning and performance of the company. Top down
analysis shows its concern about the market and economical factor of the company.
Basically, top down analysis is performed over the entire Top down analysis has been
performed over the retail industry of the Australia to analyze the macro economical factor of
the industry (Krnatz, 2016). It has been observed that it is the basic issue which is faced by
every investor while choosing the best stock in the market. For conducting the top down
analysis over the retail industry of Australia, inflation rate, GDP, interest rate of Australia
have been analyzed. It has also been observed that there are many factors to make an
influence over the retail industry of Australia.
For this analysis, many micro and macro factor of Australian retail industry have been
analyzed to found the potential of retail industry of the company. GDP is the main indicator
which helps the investor in measuring the health of economy and conditions of the state. It
has been observed that currently the world economy is facing great recession and thus the
offered return to the investors over their investment is quite less (Morote, García-Ybarra &
Castillo, 2013). Though, it has been analyzed that the retail industry of Australia is still
performing well. And the return provided by this industry is also good.

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(Yahoo finance, 2017)
It has been observed that the GDP per capital of Australia is 1.205 trillion which is
quite lesser than the GDP of India and Canada but it has been found that this is rapidly
enhancing from last years. Further, it has also been found that the exchange rate risk and
political sustainability of Australian market is quite certain in comparison of other countries
such as UK and thus it becomes easy for the investors to invest into this country and the retail
industry of the company to manage the return (Zaki et al, 2014).
(Analysis – Total retail, 2017)
Through the research over the retail industry of the Australia, it has been found that
the retail industry of the Australia is growing up rapidly from last 4 years. The growth rate of

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the industry has been observed 8% and it has also been evaluated that the return from the
retail industry is quite higher. Further, the fiscal policy of the company has also been
observed and found that various changes into the Australian fiscal policy have impacted over
the retail industry of the state and it has also enhanced the foreign investment into the
Australian market (Lou et al, 2012). It has been observed through the GDP chart of the
Australia that the GDP has been decreased from last 2 years but the current condition of the
Australian market depict an upward slope of GDP which depict that the investment would be
higher in the market as the return capacity of Australian companies would be enhanced. The
inflation rate of the Australian market has also been analyzed and found that the inflation rate
of the country has been enhanced by 1.95% from last year.
The retail industry of the company has been analyzed and found that the positive
changes have taken place into the retail industry of the Australia. The top companies of retail
industry of Australia which is Woolworths and Wesfarmers has been investigated and found
that the return of both the companies are enhancing rapidly (Luo et al, 2014). And it has also
been analyzed that the operations and the strategies which has been used by both the
companies are quite competitive and it helps the company to manage the risk and return of
the company.
Future projection on Australian stock market:
Future projection study has been conducted over Australian retail industry and it has
been found that the GDP of the country is depicting an upward slope in near future. Further,
the inflation rate and employment rate of the country has also been predicted and a future
increment has been expected in it. Thus it is a good option for the investor to invest into the
Australian retail industry (Seng & Hancock, 2012).
Industry Viewpoint:
Retail industry of the country has been analyzed and found that the revenue of the
retail industry has been enhanced from last few years and it has also been found that the total
turnover of the retail industry has been enhanced whereas many sub parts of the retail
industry are depicting a negative statistics. Further, it has also been found that the industry
would grow up in near future.

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Industry data:
(Analysis – Retail industry, 2017)
Future Outlook:
Through conducting an analysis over Wesfarmers and Woolworths, it has been
analyzed that the future performance of both the companies are quite attractive. Both the
companies are adopting the new strategies to manage the performance and profitability. The
BOD of both the companies has announced that company is planning for comeback with
strong planning.
Current intrinsic value of the companies:
Current intrinsic value of both the companies has been analyzed according to the P/E
multiple model and cash flow technique (Piotroski & So, 2012).
Wesfarmers:
Following are the share price movements of Wesfarmers.

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(yahoo finance, 2017)
This is reflecting that the share price of the company has been fluctuated very less.
Woolworths:
Following are the share price movements of Woolworths.
(yahoo finance, 2017)
This is reflecting that the share price of the company has been fluctuated very less.
P/E model:
This model has been used to analyze the intrinsic value of Wesfarmers and
Woolworths in context with the performance indicators of the industry. In this model, EPS
and PE of Wesfarmers and Woolworths have been evaluated and than through multiplying
the PE and EPS, share price has been calculated. It has been analyzed to identify the
undervalued or overvalued shares.
Wesfarmers:
Intrinsic Value: PE Multiple approach
A. Industry PE 25.25
B. EPS
0.
52

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C. Price per share 13.13
D. Actual Price 42.52
E. Over valued 29.39
(yahoo finance and Morningstar, 2017)
In the valuation of Wesfarmers share, it has been analyzed that the EPS of the industry
is 0.52 which is quite lesser than the industry PE ratio. It has been observed that the share
price of the company is highly overvalued. It has been evaluated that company is not
performing according to the industry regulations.
Woolworths:
Intrinsic Value: PE Multiple approach
A. Industry PE 25.25
B. EPS 0.78
C. Price per share 19.695
D. Actual Price 17.08
E. Under valued 2.615
In the valuation of Woolworths share, it has been analyzed that the EPS of the industry
is 0.78 which is quite lesser than the industry PE ratio. It has been observed that the share
price of the company is highly undervalued. It has been evaluated that company is not
performing according to the industry regulations (Hajkowicz, Cook & Littleboy, 2012).
Thus it has been analyzed that the performance of the retail industry of
Australian market is quite impressive and it would offer high return to the investors.
Bottom up analysis:
Bottom up analysis is a part of fundamental analysis where the internal factor of a
company is analyzed to identify the positioning and performance of the company. Bottom up
analysis shows its concern about the financial and internal; factor of the company. Basically,
Bottom up analysis is performed over the entire company and this analysis has been
performed over the Wesfarmers and Woolworths of the Australia to analyze the micro
economical factor of the companies. It has been observed that it is the basic issue which is
faced by every investor while choosing the best stock in the market. For conducting the
Bottom up analysis over the Wesfarmers and Woolworths of Australia, ratio analysis and DU

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Pont study have been performed. It has also been observed that there are many factors to
make an influence over the both of the companies.
For this analysis, many micro factors of Australian retail companies have been
analyzed to found the potential of retail industry of the company. Ratio analysis is the main
indicator which helps the investor in measuring the health of company’s positioning and
profitability (Zhang et al, 2013). It has been observed that currently both the companies are
adopting new strategies to manage the performance and profitability of the companies.
Though, it has been analyzed that the retail industry of Australia is still performing well. And
the return provided by this industry is also good.
Financial data:
Wesfarmers:
Financial data of last 2 year of the company has been analyzed to understand the
position of the company. It has been analyzed that the position and performance of the
company has been increased from last year in 2017 (Parker & Vannest, 2012).
Financial Data of Wesfarmers company
Particulars Amount Amount
AUD$ '000 AUD$ '000
Total Revenue 68,015 65,512
COGS 46,359 45,525
Operating Profit/(Loss) 21656.0 19987.0
EBIT 4138.0 1038.0
Finance cost 264.0 308.0
Net profit 2873 407
Current Assets 9667 9684
Quick Assets 3137 3424
Inventory 6530 6260
Average inventory 6395.0
Trade
receivables/Debtors 1633.0 1628.0
Average Debtors 1630.5
Total Assets 40115 40783
Average assets 40449 60604.5
Dividend Paid 13770 11340
Current Liabilities 10417.0 10424.0

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Trade Payables/Creditors 6615 6491
Average creditors 6553
Total Liabilities 16174 17834
Capital Employed 29698.0 30359.0
Long term loans 5,757 7,410
Shareholders' Equity 23941 22949
Dividend per Share
(DPS) 2.56 733
Earnings per Share
(EPS) 2.54 0.33
Price per Share 10 10
Dividend per Share
(DPS) 2.56 733
Earnings per Share
(EPS) 2.54 0.33
Price per Share 10 10
(Morningstar, 2017)
Woolworth:
Financial data of last 2 year of the company has been analyzed to understand the
position of the company. It has been analyzed that the position and performance of the
company has been increased from last year in 2017.
Financial Data of Woolworths retail company
Particulars Amount Amount
AUD$ '000 AUD$ '000
Total Revenue 65,004 56,504
COGS 38,618 33,356
Operating Profit/(Loss) 26386.0 23150.0
EBIT 5043.0 4140.0
Finance cost 1234.0
Net profit 4353 3120
Current Assets 10340 8281
Quick Assets 3223 2400
Inventory 7117 5881
Average inventory 6499.0
Trade
receivables/Debtors 1608.0 1081.0
Average Debtors 1344.5
Total Assets 49390 41455
Average assets 45422.5
Dividend Paid 13770 11340
Current Liabilities 10978.0 9086.0
Trade Payables/Creditors 10370 8631