Wesfarmers

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:

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.

Wesfarmers have a shares update: Australian sharemarket analyst UBS has rated Wesfarmers (WES) wit a Neutral stock recommendation and a share price target of $43.50 (and a valuation of $41.33 per share). The UBS Commodities team have upgraded their coal price forecasts: they have lifted their coal price forecasts for hard coking (HCC) and PCI grade coal from April 1 2008 and beyond. They are now forecasting an April 2008 HCC price of US$130/t up from US$115/t previously. Our April '09 estimate is now US$110/t vs US$100/t previously. They have updated our currency assumptions for the month-end US88.8c (82.0c previously) but the effect on WES export coal earnings is mitigated by the Group's rolling hedging policy. Combined WES/CGJ EPS up 8% FY09E and 4% FY10E due to coal price: Their official forecasts for WES published on the front page below do not include Coles. They await the outcome of the November 7 shareholder vote before we can adopt the merged group estimates. However, the high probability of a positive outcome makes it relevant to discuss the coal price impacts for the merged group. This note includes merged group earnings changes and a financial summary. The analysts have said that to qualify for a Buy rating they would need to see the share price below $39.30 (c8% lower) or upgrade their price target to over $47. While the coal price could continue to be a swing factor for our price target, they would like to see who WES appoints to run supermarkets and some evidence of a turnaround in performance. Their valuation of Wesfarmers is $41.33 (previously $39.83) post Coles, average of SOP & DCF and their price target is derived by 95% probability weight the PT if WES successfully acquires Coles under the current proposal. Their price targets (pre and post Coles) are derived by applying WES' cost of equity less dividends to our valuation.

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 (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 (WES) have retained their Reduce 1 stock recommendation with a share price target of $30.60 from stock analyst UBS. The price target was derived from applying their cost of equity less dividends. UBS have noted the following from their AGM: " Metallurgical coal exports from Curragh are expected to be within the previously guided range of 6.2-6.5mt. We forecast 6.2mt. Bunnings 1Q cash comp store sales were up 13.1% over a weak pcp (c1%) & ahead of our FY07 forecasts. Insurance has been negatively impacted by storm-related claims in NZ & drought-related claims in Aust.

Wesfarmers has a Reduce 1 stock recommendation and a $30.17 share price target for stock analyst and investment banker UBS. Coal production figures for Wesfarmers (WES) have been updated and Curragh production was down 11% on the 4Q06 due to a planned processing plant shutdown. UBS thinks that the key trigger point for the csock price is the upcoming 2007 negotiations.

Citigroup have retained their Hold, Medium risk recommendation for the Wesfarmers (WES) stock. The broker notes that the result was as expected with EPS still having some room for improvement. UBS have maintained their rating for the stock with a Reduce 1 with a share price target of $31.50 and a valuation of $30.12.