Wesfarmers (WES) Recommendation

Wesfarmers (WES) has a Neutral 2 recommendation and a share price target of $42 from Australian stock analyst UBS. The analyst has changed their negative stance on Wesfarmers assuming the bid proceeds, in the short term even if Coles disappoints we believe Bunnings & Coal should make up any short fall. WES is likely to pay shareholders a higher dividend in FY08E & FY09E than in FY07, funded by Coles excess franking credits & a fully underwritten DRP. By FY10E, we think Coles should be positively contributing to group EPS & the normal payout ratio should be restored. WES share price has fallen 11% since the CGJ offer. What is the perceived risk of going to neutral weight in WES now?: News flow is uncertain and it's hard to see a short term positive catalyst. They think WES is initially unlikely to announce any financial target for Coles. There is a small chance WES doesn't get Coles. They think the share price would fall if this is the case. However, all else being equal, they believe a rival offer would have to be c$0.65 above the value of the WES offer if it has a chance of getting the Coles Board's attention. The CGJ Board may be hesitant to switch its recommendation when WES has 12.8% voting rights. They have changed our rating to Neutral 2 from Reduce 1 given their views on the probability that WES will acquire CGJ. Given there is still uncertainty, they use the 2 rating & have not adjusted their forecasts but estimate the acquisition to be accretive from FY10E. We acknowledge that owning Coles might be a lower risk way to own WES. Their valuation has risen 11%. The analysts' price target is probability weighted 95% for a successful acquisition of Coles and 5% for the risk they don't get it. Their price target is derived by applying WES cost of equity to the valuation less dividends.

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!