Asia Pacific Equity Research Assignment

Kmart

1. Kmart margins expanded a further 50bps YoY, despite 2% sales growth and COGS headwinds from freight. What was the impact of previously announced efficiencies which drove margins up 170bps in 1H24 and 100bps in 2H24 - have all of these annualised through now? Or is there more to come from Anko in Target/TORY robots/Target consolidation/etc?

2. Is Kmart the biggest beneficiary of OneDigital investment in the group?

3. Kmart is picking up the Catch fulfilment centres, how significant is this for online unit economics? How much of online is currently fulfilled from store, how much of this could be fulfilled through these fulfilment centres and what is the impact?

4. How much have Kmart sales picked up in Jan/Feb vs. the 2% sales growth in 1H25 - How meaningful is this acceleration?

5. Anko wholesale and international retail revenues have been described as insignificant currently - is this <5>

Bunnings

1. Are freight rates and the weaker AUD a concern for the retail businesses in terms of pricing?

2. How much leverage to RBA rate cuts does Bunnings have based on its current category mix?

3. How are you planning labour and inventory for the year ahead? Do you expect higher demand from lower mortgage rates to contribute to stronger volumes?

4. How has the trade market performed in the lead up to RBA rate cuts? What do you expect the trade market to do now that rates are beginning to get cut?

5. Inventory is very clean post the summer peak - how was availability through this period? Could you have increased stock density further?

6. How are you preparing for the upcoming Easter/ANZAC day break given these holidays are well timed for DIY project work this year?

7. How many new stores are in the pipeline? Are most of these replacement stores for existing, smaller stores in the network? With the new categories do you need to open even larger warehouses?

Summary Investment Thesis and Valuation

Investment Thesis

Maintain Underweight. Bunnings and Kmart are two of the highest quality retail businesses in Australia, both of which are resilient to macro pressures but are mature in terms of sales growth. We believe the quality of these businesses is already priced in, at over 30x FY25E PER on our forecasts, given other divisions should trade at a significant discount to this. Mt Holland is unable to generate profitability in the near term with current spodumene and lithium price forecasts, and we see no material upside from multiple expansion, given it is near record high levels on a PERel basis.

Valuation

Our 12-month price target of $66.00 is derived using a blended valuation of: 1) DCF ($51.33) rolled forward at the cost of equity (8.5%), less the next 12 months’ dividends; 2) sum-of-the-parts ($72.40); and 3) PERel ($65.33). Our price target implies a ~25x one year forward PER in one years time, vs. the current share price which factors in a ~31x one year forward PER

Performance Drivers

1. 18 month LiOH ramp up called out - confirming this is to 50ktpa? In the interim, does Mt Holland continue to be loss-making?

2. How do you anticipate current lithium market prices will impact the financial viability of the Mt Holland project, and what is your outlook on price recovery?

3. Do you still intend to double refining capacity? When is FID on this? Or do current prices defer this project?

4. How does the vertical integration of mining and refining at Mt Holland provide a competitive advantage, and what are the expected benefits in terms of cost and supply chain efficiency?

5. Conversion costs are very high for a number of WA producers currently, making conversion to LiOH unprofitable. At current prices and costs, would Mt Holland be profitable if running at full capacity? If so, is that due to using your own spodumene feedstock? If that is the case, would you be better off just selling spodumene with a lower cost base and less complication?

Health

1. How does OnePass and Sister Club work together for API?

2. Has the wholesale business picked up any business from the recent merger of Sigma and Chemist Warehouse?

3. Is it possible to become price competitive with Chemist Warehouse within the Priceline business? Does the structure with franchisees hinder your ability to drop prices?

4. After making the call on wind up Catch after several years of losses, at what point will you take more significant action on API, given the sub-5% return on capital? Either through investment (get competitive on price) or by selling the asset?

Digital

1. How do you assess the ROI on the $2.2bn of digital investment across capex and opex since FY19? How much has it added to group earnings over this period?

2. Guidance for OneDigital investment has been maintained in FY25 at $70m - should this begin to moderate over the coming years as capability build is completed?

3. How do you manage customer data across brands, where they are not OnePass members, using the Flybuys program? What opportunities does this create for Officeworks, Kmart and Bunnings to leverage a unified view of the customer?

4. Does significant capital need to be invested to build a retail media capability? Or is this already in place and it is a function of convincing suppliers to invest in this service? Would any revenue and earnings from retail media be accounted for in the divisions?

Capital allocation

1. What is the capex profile over the next three years for Mt Holland and the group ex-Mt Holland? Should this begin to recede from the $1.1bn - $1.3bn range in FY25?

2. Based on the mix of debt in the business, how leveraged are interest costs to lower interest rates?

3. Will you return the Coregas proceeds through a special dividend?

4. Does Wesfarmers continue to evaluate acquisition opportunities at the same intensity it did 5 - 10 years ago?

5. What acquisitions have been deemed at or above business case at the time of acquisition?

6. How many have been EPS accretive?

7. Has Wesfarmers acquisition record over the past 10 years changed the board’s appetite for future acquisitions?

8. Would you consider a divestment of Officeworks again now that the competitive backdrop is more settled and performance is solid?

Investment Thesis, Valuation and Risks

Wesfarmers Limited (Underweight; Price Target: A$66.00)

Investment Thesis

Maintain Underweight. Bunnings and Kmart are two of the highest quality retail businesses in Australia, both of which are resilient to macro pressures but are mature in terms of sales growth. We believe the quality of these businesses is already priced in, at over 30x FY25 PER on our forecasts, given other divisions should trade at a significant discount to this. Mt Holland is unable to generate profitability in the near term with current spodumene and lithium price forecasts, and we see no material upside from multiple expansion, given it is near record high levels on a PERel basis.

Valuation

Our 12-month price target of $66.00 is derived using a blended valuation of: 1) DCF ($51.33) rolled forward at the cost of equity (8.5%), less the next 12 months’ dividends; 2) sum-of-the-parts ($72.40); and 3) PERel ($65.33). Our price target implies a ~25x one year forward PER in one years time, vs. the current share price which factors in a ~31x one year forward PER.

Risks to Rating and Price Target

Key upside risks include:

1. An upturn in discretionary spending due to changes in the macroeconomic outlook, including the outlook for housing.

2. A stronger-than-expected turnaround at Target and better-than-expected EBIT growth from Kmart and Officeworks.

3. A recovery in Spodumene and Prices which would drive Mt Holland earnings.