Fixed Income Specialists

Wesfarmers Limited (WES)

16 March 2011
Current Ratings S&P Moodys Moodys Fitch Fitch A- (Stable Outlook) Baa1 (Stable Outlook) Baa1 (Stable Outlook) BBB+ (Stable Outlook) BBB+ (Stable Outlook) Outlook Outlook Positive

Executive Summary
Wesfarmers has grown from a West Australian farmers co-op into one of Australias largest companies and is one of Australias largest public sector employers. Wesfarmers is well diversified with divisions covering some of the biggest retail brands in their respective market segments, as well as exposure to commodities, thus supporting a strong business risk profile. Wesfarmers maintains a conservative financial profile with a long term view taken to investments. This conservative financial profile results in strong credit metrics and as a result enjoys one of the best risk profiles of Australian corporates. Wesfarmers revenue streams are well diversified and include an improving Coles business which is one of the two giants of Australian non-discretionary retailing. Wesfarmers big box retail outlets, and in particular the Bunnings brand continues to outperform its market peers. Wesfarmers enjoys a strong track record of achieving long term growth in its business portfolio and provides operational stability through its consistent approach to improving returns across all of its businesses. Wesfarmers has some exposure to cyclical businesses including its mining operations and to a lesser extent its non-discretionary retail businesses which increases its risk profile, however this is easily offset by the low levels of debt held by the company, the strong operational cash flows, and the near-duopoly nature of its food retail business. The renewal of the retail businesses will continue to be a drain on cash flows over the coming years as new stores are added and older stores are refurbished, causing an increase in capital expenditure. However the strong operating cash flows of the business should see the majority (if not all) of this internally funded thus limiting any affect on metrics. Wesfarmers is one of Australias strongest companies with high quality management, strong financial profile and well diversified earnings. With continued strength in the companys key Coles

Recent Rating History Recent Rating Rating HistoryRating Date Agency Rating Date Rating S&P 09/03/11 BBB+ Agency

S&P 09/03/11 BBB+ Positive Key Financials ($m) HY11 to 31/12/10 Revenue 28,074 EBITDA 2,378 Key Financials ($m) HY11 to 31/12/10 NPAT 1,173 Revenue 28,074 Cash 1,637 EBITDA 2,378 Total Assets 40,644 NPAT 1,173 Total Debt 5,034 Cash 1,637 Gearing (D/D+E) 16.6% Total Assets 40,644 Total Debt 5,034 Key Financials ($m) FY ending 30/06/10 Revenue(D/D+E) 51,827 Gearing 16.6% EBITDA 3,786 NPAT 1,702 Key Financials ($m) FY ending 30/06/10 Cash 1,640 Revenue 51,827 Total Assets 39,234 EBITDA 3,786 Total Debt 5,353 NPAT 1,702 Cash 1,640 Gearing (D/D+E) 17.8% Total Assets 39,234 Total Debt (16/3/11) 5,353 Market Cap 31,322 Gearing (D/D+E) Market Cap (16/3/11) 17.8% 31,322

2011 FIIG Securities Limited. The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced, distributed or transmitted to a third party without FIIGs prior written permission other than to the recipients accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.
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Fixed Income Specialists

business, and strong outlook for commodity prices Wesfarmers represents a good opportunity to diversify fixed income holding with a low risk corporate bond issuer.

Company Background
Wesfarmers has grown from a West Australian farmers co-op into one of Australias largest companies and is one of Australias largest public sector employers. Wesfarmers is well diversified with divisions covering some of the biggest retail brands in their respective market segments, as well as exposure to commodities: Coles this division covers food and beverage and in addition to the Coles supermarket chain includes Coles Express (which includes its fuel outlet stores), Bi-Lo, and the groups liquor brands, Liquorland, First Choice Liquor Superstores and Vintage Cellars. HIOS the home improvement and office supplies division includes Wesfarmers two big box retailers, Bunnings and Officeworks. Target the Target department store chain is a major retailer of apparel and homewares with over 290 stores including the Target and Target Country brands. Kmart includes both the Kmart discount department store chain with 186 stores across Australia and New Zealand and Kmart Tyre and Auto Service with 251 outlets and is Australias largest employer of auto mechanics and apprentices. Insurance includes insurance brands OAMPS, Lumley, Crombie and Lockwood and WFI and covers both underwriting and broking. Coles branded offers are likely to see growth in the division moving forward following similar retailer strategies seen overseas. Resources includes a number of quality, and expanding open-cut coal mines, Curragh, Bengalla and Premier Coal Chemicals, Energy and Fertilisers manufactures and markets chemicals for mining, mine processing and industrial sectors, production and sale of LPG and LNG, manufacture of fertilisers and supply of energy to remote sites. Industrial and Safety division includes the groups protection and safety retail brands and is the market leading supplier in Australia and New Zealand for safety products servicing all key heavy industry markets in both markets. Almost three quarters of Wesfarmers EBIT is derived from retail with the Coles and Bunnings brands responsible for around half the groups EBIT performance. The non-discretionary nature of the key Coles food offering combined with its near duopoly position in the Australian market helps support a very strong business risk profile.

2011 FIIG Securities Limited. The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced, distributed or transmitted to a third party without FIIGs prior written permission other than to the recipients accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its right s to prosecute for breaches of those rights.
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Divisional EBIT
Coles

7.6% 12.6% 3.3% 8.8% 10.4%

4.0% 28.9%

Home Improvement Office Supplies Target Kmart Insurance

23.0%
Resources Chemicals, Energy & Fertilisers Industrial & Safety

1.6%
Source: FIIG Securities Limited, Wesfarmers Half Year report Dec 2010

Half Year Results 31 December 2010

The first half of the 2011 financial year has seen improvements in EBIT for the majority of Wesfarmers divisions (the exception being Target). Results were however affected by the significant rainfall events which occurred in September and December, with expectations of further affects arising from the flood and cyclone events in the first months of 2011 being reported in the full year results. First half profit after tax was $1.173bn, up 33% on the prior comparable period (first half to December 2009) and sets Wesfarmers up for its first ever full year profit after tax of over $2bn. The improved result was on the back of increased operating revenues of 5.8% to $28.1bn. The Coles division (which includes the retail brands Coles, Coles Express, Bi-Lo and Wesfarmers liquor outlets) improved sales by 5.9% and EBIT by 18.3% as the division entered the third year of its five year turn-around plan (which began after Wesfarmers acquired Coles). The improved EBIT was on the back of stronger margins, however Coles margins still lag its key competitor Woolworths, suggesting there is further room for improvement moving forward. The Home Improvement (Bunnings) and Office Supplies (Officeworks) big box retailers also grew both revenues and EBIT in tough retail markets, while Kmart continued it remarkable turnaround from the worst performer of the retail brands in the group. Target however saw both revenue and EBIT drop against a strong prior corresponding period as a result of heavy discounting (in part due to a mild summer). Wesfarmers attention to Target in the second half will include directly sourcing Target branded product to aid in differentiation from its key rivals Big W, and its Kmart stable mate. The insurance division improved in the first half, however will likely be affected negatively for the second half as a result of recent weather events, while the resource division witnessed significant increases in revenue and returns on the back of much stronger coal prices. Continued strong commodity prices in the second half and going forward should see this divisions contribution to the groups result continue to improve. The chemicals, energy and fertilisers division was a mixed bag from product to product, however overall, continued demand for the key products, and in particular ammonium and ammonium nitrate saw an overall improvement from the segment, while Industrial and Safety reported strong improvements at both the revenue and EBIT levels.
2011 FIIG Securities Limited. The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced, distributed or transmitted to a third party without FIIGs prior written permission other than to the recipients accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its right s to prosecute for breaches of those rights.
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Flood, rain and cyclones Primarily, the heavy rains in the first half year affected the performance of Wesfarmers mining division, with localised mine flooding resulting in an increased use of truck and shovel mining techniques over the more efficient dragline methods (which is not suitable when flooding occurs). The result of the increased truck and shovel activity was to push mine expenses up for the half year. Notwithstanding the higher costs, the resources division recorded an improved result on the back of higher commodity prices. In the second half of the financial year, we expect to see further increases in mining expense as the flooding and wet weather events experienced in the month of January will necessitate the continued emphasis on truck and shovel work. However, continued strength in commodity prices will likely see resources continue to outperform compared to the prior year. To a lesser extent, the flood and cyclone effects will also be felt in retail the retail business as a number of sites were either directly affected or had supplies cut off. The insurance division will also expect the flow through of claims to affect the full year result. Management have suggested a gross cost to the business of around $300m for the full effects of the floods, wet weather and cyclone events. Some of this may be returned through insurance claims.

Liquidity
Wesfarmers liquidity position remains strong as at 31 December 2010 with $2.9bn in available balance sheet capacity. With gross debt of $5.0bn and net debt of $3.7bn, Wesfarmers remains a lowly geared company and produces significant operational cash flows. Wesfarmers refinanced syndicated loans and has now extended the weighted average maturity of its funding program to 3.3 years, up from 2.8 years. The lengthening of syndicated facilities provides further flexibility for Wesfarmers going forward.

Strengths
Wesfarmers maintains a conservative financial profile with a long term view taken to investments. This conservative financial profile results in strong credit metrics and as a result enjoys one of the best risk profiles of Australian corporates. Wesfarmers revenue streams are well diversified and include an improving Coles business which is one of the two giants of Australian non-discretionary retailing. The non-discretionary nature of the majority of Coles sales results in a business which retains stability throughout the economic cycle. Further, Wesfarmers are three years into their five year plan for improving the business since its acquisition and the continued strong results gives support to the successful implementation of this plan. Wesfarmers big box retail outlets, and in particular the Bunnings brand continues to outperform its market peers. Wesfarmers enjoys a strong track record of achieving long term growth in its business portfolio and provides operational stability through its consistent approach to improving returns across all of its businesses.

Risks
Wesfarmers has some exposure to cyclical businesses including its mining operations and to a lesser extent its non-discretionary retail businesses which increases its risk profile, however this is easily offset

2011 FIIG Securities Limited. The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced, distributed or transmitted to a third party without FIIGs prior written permission other than to the recipients accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its right s to prosecute for breaches of those rights.
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Fixed Income Specialists

by the low levels of debt held by the company, the strong operational cash flows, and the near-duopoly nature of its food retail business. The renewal of the retail businesses will continue to be a significant drain on cash flows over the coming years as new stores are added and older stores are refurbished, causing an increase in capital expenditure. However the strong operating cash flows of the business should see the majority (if not all) of this internally funded thus limiting any affect on metrics.

Conclusion
Wesfarmers is one of Australias strongest companies with high quality management, strong financial profile and well diversified earnings. With continued strength in the companys key Coles business, and strong outlook for commodity prices Wesfarmers represents a good opportunity to diversify fixed income holding with a low risk corporate bond issuer.

Gavin Madson Director Infrastructure and Fixed Income

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2011 FIIG Securities Limited. The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced, distributed or transmitted to a third party without FIIGs prior written permission other than to the recipients accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its right s to prosecute for breaches of those rights.
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