Wesfarmers (WES) News Update

Submitted by Jim Thesiger on 19 May, 2008 - 21:59

Wesfarmers (WES) has a reiterated Buy stock and a medium risk rating from Australian stockmarket analysts from Citi.

Wesfarmers Ltd (WES): Coal Business Windfall

Coal price soars — Wesfarmers has finalised its Curragh coal contract prices for the Japanese 2008 Fiscal Year. The company has indicated metallurgical coal prices are up almost 230%. We have a 227% increase embedded within our financial forecasts. However, the consensus increase is only 205%, suggesting upgrades to consensus earnings.

Price rise substantial — Wesfarmers will achieve a hard coking coal price up to US$300/t for JFY08, compared with US$97/t for JFY07. The constraint on supply in Australia combined with offshore supply disruptions have led to the unprecedented coking coal prices.

Earnings implications — While the outcome is close to our forecasts, the consensus coal price increase is only 205%, implying US$20/t upside to the reported settlement. Based on our estimated sensitivity, that would equate to

$110-$130 million in additional EBIT, or a 3.0%-3.6% increase in group EBIT.

Coles update — The new MD of Coles, Ian McLeod, will commence on 26 May 2008. There have been a number of recent appointments, including John Durkan, Merchandise Director and Stuart Machin, Operations Director, both with experience in UK grocery retailing. In addition, WES has appointed former Woolworths executive, Peter Pokorny, as GM of Fresh Produce.

Our view — We reiterate our Buy / Medium Risk rating on WES. The company is well positioned for strong earnings growth over the next few years; initially from the boom in coal prices and in the longer term from higher margins in retailing. We believe there are few structural barriers to improving margins.