Why Wesfarmers Share Price Tumbled 30%

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Wesfarmers Limited’s [ASX:WES] share price has taken what could be its single largest one-day loss since listing on the ASX. At time of writing, Wesfarmers share price opened $13.17 lower, currently trading at $31.05. A loss of almost 30%.

WES is a diversified business operating in department stores, home improvement and office supplies, resources, chemicals, energy & fertilisers and industrials & safety products.

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What hit Wesfarmers?

Wesfarmers shareholders approved the $20 billion spin-off of Coles supermarkets last week via a scheme of arrangement which has given them one share in Coles for every share held in Wesfarmers. The supermarket giant has commenced trading on the ASX today on a deferred settlement basis, with the demerger to be completed by next week.

Some analysts have predicted WES shares to give up more than a quarter of their value today as Coles re-joins the stock market after an 11-year absence.

Coles was Wesfarmers’ biggest earner, although the company believes this spin-off places them in a better position to chase higher-growth investments in the long-term, free from Coles’ heavy capital requirements.

Citi and CLSA value the standalone Coles at $14.20 a share, or about 18-times 2020 financial year earnings. Deutsche Bank is at $13 and JP Morgan at between $12.70 and $13.50.

Morgan Stanley is sitting on a mid-point value of $11.09 after modelling a range of profits growth and earnings multiples assumptions.

What happens from here?

Wesfarmers have decided to retain a 15% stake in their departing supermarket chain, a chunk worth $2.3 billion. However, the board has already faced a grilling over this decision as they have stacked Coles with $2 billion of debt and retained approximately $1 billion of franking credits, meaning Coles will be unable to pay a fully franked dividend for quite some time.

Some valuations leave WES trading as low as $28.80 and as high as $35.28 a share today, recapitalising the conglomerate at under $40 billion.

The demerger also leaves WES heavily reliant on its hardware chain, Bunnings. But with the cooling housing market on the east coast this could leave the company in a rather unenviable position.

Analysts believe that Wesfarmers chief executive Rob Scott will supplement soft organic growth with acquisitions, despite lingering concerns around its botched UK hardware push.

Wesfarmers maintains keeping a strategic stake in their former supermarket chain provides an important connection, one which will reinforce opportunities to collaborate in the data, digital and loyalty areas. As part of the demerger, WES has engineered a 50/50 joint venture with Coles’ rewards program Flybuys.

In a recent statement Mr Scott iterated that:

Flybuys will be better able to realise its potential as a leading loyalty company through the ongoing support and investment of both Coles and Wesfarmers and by leveraging the broader networks of the Wesfarmers Group, including the existing partnerships with Kmart and Target.’

Keep a close eye on what Wesfarmers does next. The company has a good chunk of money to spend, which could have an impact on investor sentiment. Rob Scott has been bold in his leadership of WES, so look towards future acquisition opportunities.

Regards,

Ryan Clarkson-Ledward,
For Money Morning

PS: If you’re thinking now is the right time to buy Wesfarmers, make sure you read this free report first: How to capture MORE Aussie stock gains in a single year than most investors do in 10 years…sign up free today. 

About Ryan Clarkson-Ledward

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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