Wesfarmers shareholders are in line for a capital return from the Coles float

Ian Waldie/Getty Images
  • Wesfarmers says it is more than happy to “return surplus capital to shareholders” rather than seek acquisitions.
  • CEO Rob Scott says the most compelling opportunities to generate returns reside in the company’s existing businesses.
  • The company’s dividend policy is expected to remain unchanged post the Coles float, which it expects to complete in the 2019 financial year.

Shareholders at Wesfarmers could see a capital return from the ASX listing of supermarket group Coles as a separate company.

In an investor day presentation, Wesfarmers CEO Rob Scott made it clear that investing in the company, rather than seeking acquisitions, was a priority.

“We’ll be disciplined and discerning regarding new investments and, if we can’t find opportunities to invest, we’ll be more than happy to return surplus capital to shareholders,” he says.

Scott says the company was open to strategic stakes, partnerships and joint ventures.

However, Wesfarmers was taking a patient and disciplined approach to investment.

Scott says the most compelling opportunities to generate returns reside in the company’s existing businesses.

“These are not mature businesses, these are businesses that have a lot of runway ahead,” he says.

“We have no problems being small or having a small capital base if that delivers superior returns to shareholders.

“We’re not fixated on growth for growth’s sake. The only growth we’re interested in is growth in shareholder returns.”

However, the formal investor presentation noted “balance sheet capacity to support investment plans & opportunistic acquisitions” after the demerger of Coles.

The company says its dividend policy is expected to remain unchanged post the Coles float, which it expects to complete in the 2019 financial year.

A short time ago, Wesfarmers shares were up almost 1.3% to $46.26.

Scott’s comments today fit with his announcement in March that Wesfarmers would have a greater focus on growth opportunities within its remaining businesses and the pursuit of acquisitions.

“The capacity to act opportunistically will be retained through a strong balance sheet and a cash generative portfolio,” Scott then said.

The demerger of Coles would create a new top 30 company listed on the ASX, holding about 34% of Wesfarmers’ earnings, with about $39.2 billion in revenue and EBIT (earnings before interest and tax) of $1.6 billion.

Wesfarmers plans to keep a minority ownership interest of up to 20% in Coles and a substantial ownership stake in the supermarket chain’s loyalty program, flybuys.

Coles has been lagging its main competitor Woolworths in sales growth. For Woolworths, Australian food sales rose by 4.9% for the latest half year. Coles managed 1.9%.

In the latest half year results, Coles’ EBIT (earnings before interest and tax) fell 14.1% to $790 million for the half. Revenue was weaker at $19.98 billion, down 0.4%.

Wesfarmers would be left with Bunnings, Kmart, Officeworks, and its Industrials portfolio.

Last month Wesfarmers announced the sale of the UK-based hardware chain, Homebase, it purchased in 2016, booking a $350 million to $400 million writedown on the “disappointing” investment.

This follows a $795 million write-down of the Homebase acquisition in February this year.

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