Comprehensive Investment Analysis of Wesfarmers Limited

This report provides a comprehensive investment analysis of Wesfarmers Limited, an Australian conglomerate with diverse business interests including supermarkets, home improvement, and industrial products. The analysis covers Wesfarmers' history, product offerings, and market performance, including its competitive landscape and recent developments. It examines the company's financial performance, dividend policy, and environmental impact. The report evaluates market share, share price trends, and returns analysis, including variance and standard deviation calculations. It also discusses current competitive pressures, legislative changes, international events, and management changes affecting the company. Finally, the report offers an investment recommendation based on the analysis of various internal and external factors impacting Wesfarmers. The report concludes with a bibliography of the sources used in the analysis.

Wesfarmers
Investment Analysis
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Contents
Introduction...........................................................................................................................................1
History...............................................................................................................................................1
Products / Services............................................................................................................................1
Directors............................................................................................................................................2
Dividend Policy..................................................................................................................................2
Environmental impact and policy......................................................................................................3
Market Performance.........................................................................................................................3
Returns Analysis....................................................................................................................................3
Current and Recent Developments.......................................................................................................5
Competitive Pressures.......................................................................................................................6
Legislative Changes............................................................................................................................6
International Events..........................................................................................................................6
Management and Ownership Changes..............................................................................................6
Major Suppliers and Customers.........................................................................................................6
Investment Recommendation...............................................................................................................7
Bibliography...........................................................................................................................................7
Introduction
Wesfarmers Limited is a conglomerate with presence in many business areas which include
supermarkets, department stores, home improvement, office supplies, liquor, convenience
stores, industrial safety products, chemicals, fertilisers and coal. It is an Australian company
with its headquarters in Western Australia. The company has a shareholder base of 530000
and employs around 22000 employees (Wesfarmers, Who We Are: Wesfarmers - A
Diversified Corporation).
History
Wesfarmers was founded in 1914 as a Western Australia’s Cooperative. The first chairman of
the company was Deane Hammond. The company became a publicly listed company in the

year 1984 and acquired 100% share of CSBP in 1986. The company acquired 100% of
Bunnings shares in 1994 and opened its first Bunnings store in the same year. In the 1990’s
and 2000’s Wesfarmers made many acquisitions in the fertilizers and coal business. One of
the most important acquisitions was in 2007 of Coles. The company has also undertaken
divestments to focus on profitable businesses where it divested the Insurance broking
business in 2014. The industrials division was formed in 2015 with the acquisition of 13.7%
in Quadrant Energy. The department stores division was founded in 2016.
Products / Services
The company carries out its business activities through various brands in each business area.
The details of its products and services are:
a) Coles – Coles operates supermarkets which provide fresh food, groceries, liquor, general
merchandise and financial services. The company serves the people of Australia through a
network of 780 supermarkets and is also present online. The different brands of Coles include
Coles online, Coles Liquor, Coles Express, Coles Financial Services and Spirit Hotels.
b) Home Improvement – The home improvement is operated through Bunnings retails
products for consumer and commercial use. The company provides home improvement and
outdoor products and supplies its products to builders and the housing industry. The company
has 357 trading centres out of which 248 are warehouses and the rest are small format stores
and trading centres. The company has its centres in Australia and New Zealand. The
company went international in 2016 by acquiring Homebase to make its presence in UK and
Ireland.
c) Department stores – the company operates department stores through its major brands
Kmart and Target based in Australia and New Zealand. Kmart offers general merchandise
and apparel at low prices through its network of 200 stores. A division of Kmart known as
Kmart Tyre and Auto Service provides automotive and repair service. Target offers general
merchandise, apparel and home wares through 300 stores.
d) Officeworks – Office works is a supplier of office based products and offers solutions for
home, business and education. The company has its stores in Australia and offers its services
through stores and online.
e) Industrials – this segment includes three business areas which are chemicals, energy and
fertilisers; Industrial safety products and Resources. Wesfarmers chemicals, energy and

fertilisers business operates through its brand CSBP, Australian Vinyl’s, Australian Gold
Reagents, Queensland Nitrates, Evol LNG,Kleenheat, Quadrant Energy, Blackwoods, NZ
Safety Blackwoods, Greencap, Coregas and Workwear group. The resources division
operates through Curragh, Bengalla. The segment provides its products both domestically and
internationally.
Directors
There are nine directors in the company. Michael Chaney AO is the Chairman of the
company and its CEO is Richard Goyder AO. The other non- executive directors include Paul
Bassat, James Graham, Tony Howarth, Wayne Osborn, Diane Smith, Vanessa Wallace, and
Jennifer Westcott. All the directors have suitable experiences as per the profile they are
handling.
Dividend Policy
The company pays dividends to its shareholders twice in a year. The first dividend is called
the interim dividend and seconds the final dividend. The policy of the company is pay
dividends to its shareholders as a return on their investment but the dividends are subject to
earnings and cash flow of the company. The company has a ‘Dividend investment plan’
according to which the dividends of participating will be invested in the ordinary shares at the
dividend payment date. The company may issue new shares or transfer the existing shares
depending on the director’s discretion.
Environmental impact and policy
Wesfarmers believes in corporate governance and complies with ASX Corporate Governance
Principles and Recommendation. The company addresses the climatic changes in two ways.
It monitors its gas emissions and tries to reduce its effects wherever possible and also it
analyses the risks associated with the climatic change for its various business and tries to
minimise the risks. Some of the initiatives taken by the company to improve the environment
include investment in solar energy by Bunning’s and reduction in use of water by Resources.
Market Performance
Wesfarmers operates in the Consumer staples sector in the Food and Staples retailing
industry. Wesfarmers and Woolworth hold 70% of the Australia’s fresh food and grocery
market share out of which about 30% belongs to Wesfarmers (Akhtar & Akhtar, 2016).

Bunnings has a 20% market share in the home improvement market in Australia (Dagge,
2016).
The company’s share price as of September 2017 was $41.43 and it has a market
capitalisation of $46.16 billion. The P/E ratio of the company is 16.29 and the company’s
beta is 1.02 (YahooFinance). Beta of 1.02 means that the volatility of the share price of
Wesfarmers is almost the same as the market.
Returns Analysis
The daily closing price for Wesfarmers and All Ordinary Index for the period 1st August 2014
to 31st July 2017 and for the period 1st August 2011 to 31st July 2014 have been given in the
excel provided in the annexure. On the basis of the above prices, the variance and standard
deviation for the daily returns of Wesfarmers and Index for the period 1st August 2011 to 31st
July 2014 have been calculated.
Wesfarmers All Ordinary Index
Variance 0.000113 0.000079
Standard deviation 0.011 0.009
(Detailed calculation in the annexure)
The graph representing the share price history of the company and All Ordinary Index for the
period 1st August 2011 to 31st July 2014 is given below:
8/1/2014
10/12/2014
12/23/2014
3/5/2015
5/16/2015
7/27/2015
10/7/2015
12/18/2015
2/28/2016
5/10/2016
7/21/2016
10/1/2016
12/12/2016
2/22/2017
5/5/2017
7/16/2017
0
5
10
15
20
25
30
35
40
45
50
Wesfarmers
Wesfarmers

8/1/2014
10/6/2014
12/11/2014
2/15/2015
4/22/2015
6/27/2015
9/1/2015
11/6/2015
1/11/2016
3/17/2016
5/22/2016
7/27/2016
10/1/2016
12/6/2016
2/10/2017
4/17/2017
6/22/2017
0
1000
2000
3000
4000
5000
6000
7000
Index
Index
The share price of Wesfarmers has been in the range of $32 to $42 over the 5 years period.
From the above graph we see that the shape of the line curve is similar for both Wesfarmers
and the Index. This is because of the beta of Wesfarmers which is 1.02. It means when the
index changes by 1%, the price of Wesfarmers share will also change by 1.02%. This relation
can clearly been seen in the above graph. For the year 2014, both follow the same pattern
with a rise in prices, then a fall, again a rise, then a fall and then an increase which has
remained stable for some time. Of course the change in price of Wesfarmers is more frequent
than the Index. Similar price change patterns can be seen for the year 2015 also. However, in
2016, the pattern has varied slightly with Wesfarmers price increasing more than the index in
the months of March, April and May.
The shares of Wesfarmers are not very risky because not much movement in the line curves
can be seen for the five years period. The line curve is mostly straight with the curve going
upwards during the period March to June 2017.
The average return of Wesfarmers from August 2014 to July 2017 is 0.23% as compared to
0.084% in the 2011 to 2014 average returns. The average returns of the market for 2014 to
2017 are 0.01% as compared to 0.033% in the 2011 to 2014 average returns. We see that the
average returns have fallen for both the market and Wesfarmers from 2014 to 2017. The
change in average returns of the market and Wesfarmers is more than as predicted by the
standard deviation. Wesfarmers has a standard of 1.1% in 2011-2014, the average returns
have decreased by 72% which is much above the expected deviation. Similarly for the
market, the standard deviation was 0.89% in 2011-14, the average returns have decreased by

70% which is again above the expected deviation. Thus, in this case standard deviation has
not been a reliable predictor. This may be due to change in factors like government
regulations, change in the nature of the industry etc. Such changes may bring about a sudden
change in the share price and thus render the standard deviation measures meaningless.
Current and Recent Developments
The share price of the company has been in the range of $39 to $43 over the period from
August 2016 to August 2017. The share price is impacted by many factors both internal and
external. Internal factors relate to the company performance, change in company policies,
management and other things. External is the change in the industry, economy or the market
in which the company operates. Such changes will impact all the companies operating in the
similar environment. The various internal and external factors which have impacted the share
price of Wesfarmers recently have been discussed below.
Competitive Pressures
The retail industry has become very competitive with major competition coming from
Woolworths and Aldi. Wesfarmers operates supermarkets through Coles which differentiates
itself in providing low cost products. Woolworths was already a strong competitor but now a
third competitor Aldi has entered the Australian market which is offering branded products at
lower prices as compared to both Wesfarmers and Woolworths and thus it has been able to
lure customers (Heffernan, 2016). Coles is one of the highest revenue generating segments of
Wesfarmers.
Legislative Changes
There were several government level challenges faced by the company in the recent years.
some of which include the increasing high corporate tax rate in Australia, difficulty in doing
business across Australia due to lack of uniformity in different state legislations. Another
issue relates to introduction of new amendment in competition and consumer act. The
Australian government introduced the Competition and Consumer amendment in December
2016 to curb the anti-competitive conduct of firms with substantial market power (Taperell,
2017)

International Events
Wesfarmers forayed into the international markets with its major brand Bunnings acquiring
hardware stores in Ireland and UK. The acquisition is of the second largest hardware
company is UK which is Homebase. The company has acquired 265 Homebase stores and
will run them with the name of Bunnings (Hatch & Mitchell, 2016).This acquisition will
increase its international presence and thus increase its revenue.
Management and Ownership Changes
There has been a major change in the company’s management with the company announcing
the appointment of new CEO and managing director Rob Scott who will replace Richard
Goyder. Also Bunnings head John Gillam left the company in 2016 against the company’s
acquisition of the UK based hardware brand for $705 million (Low, 2017).
Major Suppliers and Customers
The company has only strengthened its relationship with its suppliers to bring efficiencies to
business. The company entered into a 10 year contract with a farming company which will
supply truss tomatoes all year round with an innovative technology to produce these tomatoes
in a greenhouse using solar power and sea water (Wesfarmers, Sourcing)
Investment Recommendation
Based on the above analysis, it is recommended to buy or hold the shares of Wesfarmers.
Wesfarmers is a successfully diversified company. Low earnings in one business segment are
offset by high earnings in another segment. Like in 2016, Target and Curragh faced difficult
trading conditions and there were huge impairment charges which decreased the net profit of
the company. However, strong performance by Coles, Bunnings, Kmart Officeworks and
Chemicals and fertilisers business more than offset the low earnings effect. The company has
gone overseas with Bunnings and this promise to increase the company earnings further. As
far as the share price history of the company is concerned, the share prices of Wesfarmers
move in tandem with the market as seen above. The share prices increased at a faster rate
between 2011 to 2014, giving average daily returns of 0.84% whereas the same has decreased
to 0.23% for the period 2014 to 2017. This is because the company was developing at a fast
pace during 2011 to 2014 and now the company has almost reached its saturation. However,
now to further increase its earnings, the company has resorted to developing international
markets to increase its scope.

Thus, it is expected that the company’s share price will move further upwards and hence, it is
recommended to buy or hold the shares of Wesfarmers.
Bibliography
Akhtar, S., & Akhtar, F. (2016, March 17). Retail outlook: big retailers feel the pressure of new
challengers. The Conversation.
Dagge, J. (2016, September 29). Bunnings boss John Gillam bullish on British stores. Herald Sun.
Hatch, P., & Mitchell, S. (2016, January 18). Wesfarmers takes Bunnings to the UK. Retrieved
September 22, 2017, from The Sydney Morning Herald:
http://www.smh.com.au/business/retail/wesfarmers-buys-homebase-for-705-million-
20160117-gm7xgv.html
Heffernan, M. (2016, November 7). Woolworths, Coles, Aldi: which is cheapest for branded products?
Retrieved September 22, 2017, from The Sydney Morning Herald:
http://www.smh.com.au/business/retail/woolworths-coles-aldi-which-is-cheapest-for-
branded-products-20161101-gsf9ov.html
Low, C. (2017, February 15). Change the only constant at Wesfarmers says incoming boss Rob Scott.
Retrieved September 22, 2017, from The Sydney Morning Herald:
http://www.smh.com.au/business/retail/change-the-only-constant-at-wesfarmers-says-
incoming-boss-rob-scott-20170214-gucuz5.html
Taperell, G. (2017, February 14). Strengthening the section 46 misuse of market power provision.
Retrieved September 22, 2017, from KPMG:
https://home.kpmg.com/au/en/home/insights/2017/02/section-46-misuse-market-power-
provision-14-february-2017.html
Wesfarmers. (n.d.). Sourcing. Retrieved September 23, 2017, from Wesfarmers:
http://sustainability.wesfarmers.com.au/our-principles/sourcing/suppliers/
Wesfarmers. (n.d.). Who We Are: Wesfarmers - A Diversified Corporation. Retrieved September 17,
2017, from Wesfarmers.com: http://www.wesfarmers.com.au/who-we-are/who-we-are
YahooFinance. (n.d.). Wesfarmers Limited (WES.AX) : Summary. Retrieved September 17, 2017, from
Finance.Yahoo: https://au.finance.yahoo.com/quote/wes.ax?ltr=1