Macquarie Securities has thrown its support behind Wesfarmers’ plan to demerge Coles into a separate ASX listing, suggesting that the two new entities could be worth a combined value of around $49 or $50 a share, compared with the current Wesfarmers price $41.80.
If the demerger resulted in value appreciation of that amount, it would represent a 17 to 19 per cent gain.
“We have held the view for some time that there is hidden value in Wesfarmers and it is encouraging that the group is seeking to realise it,” Macquarie said in a note to clients following the Wesfarmrs announcement.
Its view is that the Wesfarmers share price undervalues the Bunnings business.
“With a smaller profit base for each business, we believe strategic initiatives will be more material to earnings.”
Wesfarmers without Coles will have a stronger growth profile, while a standalone Coles would appeal to more defensive investors interested in stable returns over time.
Wesfarmers said Coles was a “mature and cash generative business, which is expected to have a strong balance sheet and dividend paying capacity.”
Without Coles, Wesfarmers will “target a higher capital weighting towards businesses with strong future earnings growth prospects.”
Macquarie estimates that Wesfarmers without Coles would have balance sheet capacity of around $4 billion. The company has signalled that it is keen to grow by acquisition as well as organically.
Coles currently represents one-third of group earnings. Wesfarmers intends to keep a 20 per cent stake in Coles “to support strategic alignment between Wesfarmers and Coles in relation to various growth initiatives, including such areas as data and digital.”
Post-Coles, Wesfarmers would have the Bunnings business (Australasian and United Kingdom) accounting for close to 50 per cent of revenue and EBIT, as well as Officeworks, Kmart and Target.
Its portfolio of chemicals, energy, fertiliser and industrial businesses account for about 12 per cent of revenue and 21 per cent of EBIT.