Wesfarmers (WES) Update

Submitted by Craig Strzelecki on 3 July, 2007 - 18:14

Wesfarmers (WES) has a Reduce 1 share trading recommendation and a price target of $38.85 from Australian share trading analysts UBS. The analysts see Coles trading at $16.50 based on a $45.73 WES price: The Coles Board have agreed to a $17.25ps offer which consists of $4 cash, $13 WES scrip and a $0.25 Coles dividend. The key risk for CGJ shareholders is the fact that CGJ is linked to the Wesfarmers share price. The transaction is not due for completion until October after approval via a scheme. WES will go ex an estimated $1.37 dividend prior to completion. So even if WES holds its current price CGJ shareholders get $16.86 in October (or $16.50 today, time adjusted) not $17.25. WES EPS might move -4% in FY08E, -2% in FY09E, +9% in FY10E: Their assumptions are based on significant improvement in the CGJ assets by FY10. Risk - Wesfarmers (WES) to own 100% of CGJ: The details of this transaction have changed appreciably since WES’ first indicative offer. Wesfarmers (WES) is now to own 100% of Coles, previously this was c50% of the Everyday Needs business and 100% of Target & Officeworks. The scrip component is now c63% of the EV vs an initial c25%. Given the move in the WES share price it now seems less dilutive for WES to use its scrip. It is also the only way this acquisition can be done given the exit of its private equity partners. Wesfarmers (WES) only needs to trade at $41.16 (ex our div) for the 20 day VWAP prior to the 2nd court date to avoid breach of a key condition. So the stock could trade anywhere prior to that and not affect the deal. WES could trade below $42.53 ($41.16 + $1.37) based on the analysts’ view that this proposed offer carries more risk than the structure the market was previously expecting. Their unchanged price target is derived by applying the cost of equity less dividends to our underlying valuation.

Wesfarmers Limited is listed on the Australian Stock Exchange (ASX) under stock code WES. You can view their investor website here. WES was listed on the ASX on 15 November, 1984. Wesfarmers is a diversified industrial with interests in chemical and fertiliser manufacture; gas processing and distribution; coal mining and production; building materials, hardware, industrial and safety products and services; rail transport and insurance. Headquartered in Perth, Western Australia, Wesfarmers’ activities are currently focused in Australia and New Zealand. Since its public listing in 1984, Wesfarmers’ assets have grown from $400 million to over $7 billion and earnings have increased from $9 million to over $600 million. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade WES. Check your charts and good luck with your share trading!