Mopping up

1H23 RESULT

Need To Know

• WesCEF and Kmart outstanding
• Bunnings margin slipped, but sales performance OK
• Catch Group lost $108m, restructuring underway
• Capex at Mt Holland lithium project increases
• Interim dividend 88cps fully franked

More value conscious shopping and much higher fertiliser prices were behind the strong Kmart and WesCEF outcomes for Wesfarmers. Higher costs are pestering earnings in other areas but the interim result at a group level was satisfactory.

WesCEF. Sales revenue of chemicals, LPG/LNG and fertiliser increased 30% on higher commodity prices. EBIT increased 48% in the period. The division includes the Mt Holland lithium project which is under construction but now faces a bigger capex of $1,200-1,300m (WES share) due to labour pressures and some delays to capital items. The 10-20% increase in cost is accompanied by a 6-month slippage in time to first production of lithium hydroxide  now due in 1H of CY25.

Kmart shines. Customers seeking value items have flocked to Kmart bumping 1H23 sales up 24.1%. Comparable store sales growth at Kmart was 17.1%, and 2.8% at Target. EBIT increased 93.6% to $515m and margin went from 4.8% to 8.3%.

Bunnings. Sales growth of 6.3% was exceeded by cost growth of 6.6%, hence EBITDA margin slipped 19bp. The East Coast wet weather did not stop customer foot traffic increasing during the period.

Catch Group. Previously included in the Kmart Group, Catch has been separated partly to remove the blemish from Kmart. Catch’s gross transaction value fell 26.8% in 1H23 and the division lost $108m EBT which included $33m in restructuring costs. Catch simply had too much of the wrong stock so plenty of work is underway to fix this. Catch is to form part of WES’s e-commerce platform and will be integrated with the OnePass program. 

Health. The API Group has been quickly integrated into this division which contributed $30m of EBIT. COVID-19 certainly plumped up foot traffic through pharmacies so that revenue was boosted to the tune of $200m in anti-viral products and some price inflation. At 31 December 2022, this division had 83 Priceline company-owned stores, 387 Priceline franchisee stores and 96 Clear Skincare Clinics. WES also picked up 60% of SiSU, a business that provides a network of 300+ health stations that provide health checks and biometric data to customers. 

Investment View. We maintain our Sell recommendation on the premise of sales normalising at Bunnings, and the capex required for WES to digitalise more of its business.

Figure 1: 1H23 Result

Specific Disclosure: Sandstone Insights analyst holds a position in the subject company.