High-quality and unique business assets in attractive markets, lead to share price growth.
Wesfarmers Limited, (Wesfarmers or the Group, ASX: WES) was established in 1914 as a Western Australian farmers’ cooperative, and today is one of Australia’s largest ASX-listed companies. With headquarters in Perth, Wesfarmers is a conglomerate with businesses that span home improvement and supply of building materials; general merchandise and apparel; office and technology products; health, beauty and wellbeing products, wholesale distribution of pharmaceutical goods; manufacturing and distribution of chemicals and fertilisers; development of an integrated lithium project, as well as gas processing and distribution assets.
A diversified conglomerate strategy that works!
A conglomerate business structure is one where several separate and different businesses operating in unrelated industries and owned by a single parent company come together and form a diversified Group. This has the effect of spreading risk across the different entities and industries and reducing profit fluctuations that may otherwise result from seasonal or cyclical risk and industry-specific risk.
The alternative business structure is a single-focus entity with specialist capabilities in a specific industry or sector that provides the business with a durable competitive advantage.
It is a widely held investment rule that a single-purpose business with a specific industry focus, will always generate superior shareholder returns compared to a conglomerate business structure. However, Wesfarmers is a conglomerate that has achieved among the highest shareholder returns of any ASX-listed company in Australia. It is said that Wesfarmers is the exception that proves the rule!
Wesfarmers prominently declare in its shareholder reporting material that their primary objective is to provide a satisfactory return to shareholders. This simple statement is backed up by a 40-year history of significant share price out-performance. Wesfarmers has delivered long term total shareholder returns since listing in November 1984 of 19.5 percent per annum, compared to 10.6 percent per annum for the All-Ordinaries index over the same period. Throughout the last 10 years Wesfarmers’ shareholder returns are 14.4 percent per annum compared to 8.5 percent per annum on the broader market, and for the past 5 years Wesfarmers’ shareholder returns are 19.6 percent, against 9.5 percent per annum for the All-Ordinaries index. These total shareholder return measures are based on 100 percent reinvestment on the ex-dividend date and full participation in capital management initiatives.
Unique and high-quality assets in attractive markets
Wesfarmers owns a portfolio of high-quality, value-based retail businesses in attractive markets that have broad customer appeal. These businesses include K Mart and Target, Coles, Bunnings, Officeworks, and Priceline Pharmacy. A key demand driver of these businesses is Australia’s population growth, which is now 2.5 percent per annum, and up from 1.6 percent per annum prior to the Covid pandemic, when the OECD average population growth rate was 0.6 percent. These retailers are well-positioned for continued demand growth from the demographic changes occurring in Australia today.
With $33 billion in annual sales and 10 million transactions a week in FY23, these businesses rely on direct sourcing and own-brand capabilities, which means they leverage their own goodwill, rather than build and then pay for somebody else’s goodwill. In this way, Wesfarmers’ operating model brings affordability to the sectors in which it operates.
Wesfarmers’ other business assets provide exposure to chemicals, energy, fertilisers, and lithium. Wesfarmers’ Kwinana lithium refinery is now 75 percent complete. The Group supplies its WA Goldfields customers with sodium cyanide and nitric acid, and ammonium nitrate for explosives. Wesfarmers is also involved in LPG and LNG production. The Group relies on low-cost, scalable operating models, and supply chain synergies across these industrial businesses.
The diversified Group’s operations are underpinned by a strong balance sheet to support long-term investment in value-accretive opportunities, as illustrated by the expected FY24 net capital expenditure of about $1.2 billion.
Wesfarmers’ strategy involves a forward-looking approach using advanced data and digital capabilities that drive productivity and efficiency gains through supply chain automation to reduce lead times and improve stock availability. The Group’s advanced data analytics capability also support new earnings streams through e-commerce and extensive use of customer loyalty programs.
In the final analysis, the key to Wesfarmers’ impressive long-term shareholder value accretive outcomes is its clearly defined focus on its primary objective which is to deliver a satisfactory return to shareholders.
Michael Kodari is a globally recognised investor, philanthropist, and leading financial markets expert, renowned for his exceptional performance. With a strong foundation in financial markets, Michael has advised leading financial institutions and governments.
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