We recently downgraded our recommendation to Sell on the premise of flat sales at Bunnings for the next three years. The company strategy day did not change our thinking and revealed a cautious approach to group online capability.
Bunnings management is staunchly determined to grow earnings. There are many levers the company can pull to sustain its already lengthy period of earnings growth, including cost cutting. The goal is for trade sales to lift from high-30s to around 50% of sales. We think this would require an additional $4-5 billion of sales but would also require more capex to get there.
Bunnings has opened its first fulfilment centre in Melbourne for online orders. There is likely to be 7-8 of these centres around the country. The company acknowledges it will need to expand on its distribution capability but prefers to use its existing 5 Distribution Centres to achieve more space. With the stated ambition of lifting trade, we think Bunnings will have to increase DC capacity to avoid placing capacity stress on its stores.
OneDigital, the new division focused on data and digital assets, will focus on accelerating WES’s online growth. Excluding Catch, the division is expected to lose $80 million in FY22f and $100 million in FY23f.
OnePass ($4/month for free delivery) is the equivalent to Amazon’s Prime ($7/month) but the latter already has 2 million subscribers – a big head start.
Fulfilment and the breadth of the offer will be crucial elements, along with how the company will approach delivery cost recovery. OneData, the renamed analytical division, will play a part in a group-wide view of its 13 million known customers and its marketing costs.
WES’s resources division, WesCEF now includes the Mt Holland lithium project. This business often flies under the radar but has been the beneficiary of very strong demand for fertilisers particularly, amidst high commodity prices.
The 50-year Mt Holland lithium project will commence production of 50ktpa of Lithium hydroxide (WES share 50%) from the Kwinana refinery in 2H of CY24. WES’s share of the capex is about $950 million. Lithium demand is being driven by market fundamentals for battery electric vehicles.
WES’s fledgling Health division had little to say. The API acquisition is being integrated and weaker near term earnings is expected. The broader opportunity for healthcare investment is certainly large, but WES’s plans are indeterminate at this point.
Investment view
WES’s reticence to build its online capability is based on a lack of clarity of return on investment. In the long term, this reactive approach could cost it dearly. When Amazon first set foot on Australian shores a few years ago, panic swept the consumer market as if the Vikings had arrived to rout the Saxons. Instead, Amazon has quietly gone about building its capability and already boasts some 2 million subscribers to its superior Prime offering.
WES’s OneDigital strategy spans several of the company’s divisions and Catch Group will be a funnel for online delivery. But the clear autonomy of each division places the ambitions around online, IT, data and store networks in separate hands. WES definitely sees online as an opportunity, but the incrementality of online sales will be low.
The corollary to the online strategy is the IT and supply chain support network. Bunnings will move slowly to add Distribution Centre capability but does want to move faster on fulfilment through dark stores to manage online deliveries. Bunnings, at approximately 70% of group valuation, has rightly earned its place in the Pantheon of retailing in Australia, but no empire lasts forever. After 15 years of consecutive earnings growth, we see flat earnings for Bunnings in FY23f as sales normalise post-pandemic.
Risks to investment view
Higher interest rates and inflation could affect consumer confidence and spending in the next year.
Recommendation
We have retained our Sell recommendation.
