Wesfarmers (WES) Todays Update

Submitted by Jim Thesiger on 29 May, 2008 - 14:02

Wesfarmers (WES) has a $39.75 share price target from Australian stockmarket analysts from Citi.

Wesfarmers (WES) Coal price upgrades drive EPS up c.20%

Event: We have upgraded our coal price assumptions:

The UBS commodities team has increased coal prices. Our new forecast for JFY 09e (April 1 2009) thermal coal is US$160/t, and for HCC is US$300/t. Given the considerable cost inflation impacting global coal production; for both operating and capital expenditure costs, we have raised our long-term price forecasts. Our long-term thermal coal price forecast increases to US$65/t (+18%) and our long-term coking coal price increases to US$100/t (+33%).

Impact: FY10 EPS up 22%, FY11 EPS up 24%:

On top of the coal prices changes, we have updated our currency assumptions to $0.94 USD/AUD from $0.91 previously. Medium term cash costs have been increased, partially offsetting the prices increases, with FY12 cash costs of A$77/t for Curragh vs A$54/t previously.

Action: Maintain Neutral rating:

While the coal price should continue to be a positive in the short to medium term, we still see significant risks with the Coles turnaround and with discretionary retail earnings (1/3rd of FY09 EBIT). In our view the WES share price is factoring in a reasonable improvement in Coles earnings over the next 5 years. We believe the company will have to exceed the market’s expectations in the short term for the stock to outperform on a 12 month view.

Valuation: $37.61 (up $1.00) using average of SOP & DCF; PT increases

Our 12-month price target increases to $39.75 (previously $38.45). This is derived by applying WES’ cost of equity less dividends to our valuation.

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