WESFARMERS LIMITED

WESFARMERS
LIMITED
Analyst Report
Griffith University
Osmolovskaia Irina

3210AFE Advanced Corporate Finance, Irina Osmolovskaia, 5004826

Introduction
The main purpose of this report is to provide an overview of Wesfarmers
Limited (WES) for potential investors. We consider its corporate governance
structure; its reputation within the community and social responsibilities; its
key financial indicators such as risk and return, including both historical and
expected. Finally we consider the recent performance of the WESs stock in
the financial market.

The Chief Executive Officer

Richard Goyder has been the Managing Director and Chief Executive Officer
of Wesfarmers Limited during the last 11 years. Mr. Goyder worked at
Tubemakers Australia Limited, before he commenced with Wesfarmers in
1993. He had a number of positions including General Manager at
Wesfarmers' Business Development department and also as Managing
Director of Wesfarmers Dalgety Limited, which later became Wesfarmers
Landmark Limited. Mr. Goyder was appointed in May 2004 and assumed the
role on 13th July 2005. His remuneration for the 2015 financial year was
$9.9M, which includes fixed remuneration, non-monetary benefits, postemployment benefits (including superannuation) and his annual cash
incentive payment. Also Mr. Goyder holds 267,186 performance rights and
961,350 shares of WES; thereby the holder of the position of Chief Executive
Officer is also a stockholder of the corporation.

The Board of Directors

The Board of Directors currently consists of 11 directors, including nine nonexecutive directors. Bob Every has been Chairman since November 2008 and
a director since February 2006. His remuneration for the 2015 financial year
was $730,987. Michael Chaney has been a Director since June 2015 and
Chairman-elect, so his remuneration for 2015 was $200,407. Terry Bowen
has been a Finance Director since May 2009. He has 154,406 performance
rights and 444,401 shares of WES; his remuneration was $5,310,636. Paul
Bassat has been a director since November 2012. Also he is director of
Square Peg Capital Pty Ltd, the Peter MacCallum Cancer Foundation, The
Princes Charities Australia Trust and the P&S Bassat Foundation.

His

remuneration for the 2015 financial year was $246,362. James Graham has
been a Director since May 1998. He has 15,120 units in BWP Trust and
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3210AFE Advanced Corporate Finance, Irina Osmolovskaia, 5004826

804,493 shares of WES; remuneration for 2015 financial year was $240,487.
Tony Howarth has been a Director since July 2007; remuneration was
$392,487. Wayne Osborn has been a Director since March 2010. His
remuneration for 2015 financial year was $265,987. Diane Smith-Gander has
been a Director since August 2009; remuneration was $254,987. Vanessa
Wallace has been a Director since July 2010. Also she is the Executive
Chairperson of Strategy (Japan); remuneration was $240,487. Jennifer
Westacott has been a Director since April 2013; remuneration was $254,987.

Financial Market Considerations

Wesfarmers Limited is listed on Australian Securities Exchange. This

Analysts recommendation is hold. Trading volume is 1,387,970 (Appendix
1); average trading volume for last month is 1,843,664 (Appendix 1). Current
share price is $43.03. By analysing data of stock price for the period from 20
of July 2016 to 19 of August 2016 (Appendix 1), we can see that it varies
between $41.80 on 22nd of July to $43.22 on 17th of August (Appendix 1),
i.e., sudden changes in the price have not observed; average price for period
is $42.57 (Appendix 1).

Wesfarmers Limited Performance 20/07/16 - 19/08/16

43.5

43

42.5

$ Price

42

41.5

41

Source: Australian Securities Exchange

Societal Constraints

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3210AFE Advanced Corporate Finance, Irina Osmolovskaia, 5004826

Wesfarmers Limited has to ten community and environmental impact

principles, which include: job security, the opportunity to develop careers for
employees respect to the supplier, quality control and product safety,
reducing emissions intensity of their businesses, reduce water consumption
and waste disposal in landfills, maintaining strong corporate governance
policies. WES tries to adhere to this policy. It has not been a recent target of
social criticism and does not have a particularly bad reputation as a
corporate citizen, but at the same time it does not have a particularly good
reputation.

Historical Risk Parameters and Beta

Historical Beta was calculated in Excel by running a regression of return on
WES against return on S&P/ASX 200 using monthly data for period from
August 2010 to August 2016 (Appendix 2). By analysing this regression we
can see, that intercept of the regression equals 0.154 (Appendix 3) and slop e
of the regression equals 0.8186 (Appendix 3). Intercept tells us about
performance of the companys stock during the period of regression, as it is
positive it means that WES did better than expected. Slope of the regression
is Beta, so estimated Beta equals 0.8186 (Appendix 2). Standard error, which
was obtained from Bloomberg, equals 0.115 (Appendix 3), so the true Beta of
WES could range from 0.7036 to 0.9336. It measures the relative risk of WES
with S&P/ASX 200. Beta of market portfolio always equals 1, so we can see
that WES stock is about 18% less risky than the overall market.
Estimated correlation of the regression is 0.650 (Appendix 2), so correlation
squared equals 0.4225 (Appendix 3). It shows us that 42.25% of WESs risk
can be attributed to market factors, such as interest rate risk, inflation risk,
foreign exchange risk, etc. It cannot be diversified away and therefore should
be rewarded by higher return. Also we can see that 57.75% of WESs risk is
associated with the company's specifics factors, so it should be diversifiable
by portfolio.
Historical Beta 0.8186, which we estimated, is levered Beta, which shows us
the level of risk faced by the WES due to financial leverage. Now we can
estimate unlevered Beta or asset beta, by using average figure of D/E ratio
for period from 2010 to 2016, which equals 21.74% (Appendix 4), and
marginal tax rate for WES, which equals 30% (Appendix 4). Estimated
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3210AFE Advanced Corporate Finance, Irina Osmolovskaia, 5004826

unlevered Beta is 0.711 (Appendix 4) and it shows us the level of risk due to
business factors in which WES operates.

Return and Cost of Equity

The average historical return on WES was estimated by using monthly data
for period from August 2010 to August 2016 and it equals 0.48% (Appendix
2), what is slightly higher than the average historical return on market
portfolio, which equals 0.39% (Appendix 2). The expected rate of return on
WES was found by using CAPM model and data was obtained from
Bloomberg: Market Risk Premium is 7.95%, Risk Free Rate is 1.91% and Beta
is 0.833 (Appendix 5) and It equals 8.53% (Appendix 5). Thus we need a
return equals at least 8.53% to be compensated for the risk of investment in
the equity of WES; whereas managers of WES must be sure that they will
make this return on their equity investment in individual project, so from the
point of view of managers it is cost of equity.

Default Risk and Cost of Debt

Moodys rating of WES is A3 (Appendix 6), what is the bottom of the A
category and means

that it is still favorable investments, but adverse

changes in market conditions may lead to losses. Rating, default spread and
marginal tax rate, which is 30% for WES, are used to calculate the after-tax
cost of debt. In this case cost of debt was obtained from Bloomberg and
equals 2.23% (Appendix 9).
In order to analyse the proportions of debt and equity used by WES to fund
its investments and the changes in these proportions, we will look DebtEquity ratios of WES for period from 2010 to 2016. How we can see during
the period from 2010 to 2014 figures of Debt-Equity ratio have not changed
significantly and remain within 19.26% in 2011 to 22.21% in 2013 (Appendix
7), but it was sharply increased from 19.49% in 2014 to 26.34% in 2015
(Appendix 7). It shows us that WES strongly increased debt in order to
finance its projects, i.e., larger proportions of its investments financed by
debt rather than equity, so it increases default risk. Debt-Equity ratio slightly
decreased to 25.17% in 2016 (Appendix 7).

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3210AFE Advanced Corporate Finance, Irina Osmolovskaia, 5004826

Cost of Capital
The market value of equity of WES is $46,858.3M, the market value of debt is
$6,282.0M (Appendix 8), and so the weights of equity and debt in WES equal
88.2% and 11.8% respectively (Appendix 8). By using these figures as well as
Cost of Equity equals 8.5% and Cost of Debt equals 2.2%, we found Weighted
Average Cost of Capital for WES, which equals 7.8% (Appendix 9).

Conclusion
Wesfarmers Limited has strong corporate governance structure. Richard
Goyder is Managing Director, Chief Executive Officer and also a major
shareholder, as well as Finance Director Terry Bowen, so personally
interested in its good performance of corporation.

WES has not been a

recent target of social criticism and does not have a particularly bad
reputation as a corporate citizen, but at the same time it does not have a
particularly good reputation. The stock prices are quite stable with slight
fluctuations; the recommendation of this analyst is hold. The average
historical return is slightly higher than the average historical return on
market portfolio. WES is less risky than the overall market; slightly more than
half of the potential risks associated with the company's specifics factors, so
it should be diversifiable by portfolio. WES is suitable for investors who want
to have a stable income without exposure to a high level of risk, but it is
impossible to have abnormal profit.

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3210AFE Advanced Corporate Finance, Irina Osmolovskaia, 5004826

References
1. Damodaran, A. (2015). Applied Corporate Finance (4th ed.). Milton, QLD,
Australia: John Wiley & Sons Australia Ltd.
2. Reilly, F. K., & Brown, K. C. (2012). Investment Analysis & Portfolio
Management (10th ed.).
3. Bloomberg
4. Australian Securities Exchange,
http://www.asx.com.au/asx/research/company.do#!/WES
5. Wesfarmers Limited, http://www.wesfarmers.com.au/
6. Annual Report 2015, http://www.wesfarmers.com.au/docs/defaultsource/reports/2015-annual-report.pdf?sfvrsn=4
7. 2016 Half-year Results Briefing Presentation,
http://www.wesfarmers.com.au/docs/default-source/resultspresentations/2016/2016-half-year-results-presentation.pdf?sfvrsn=0
8. Yahoo Finance, https://au.finance.yahoo.com/q/ks?s=WES.AX
9. Australian Financial Review, http://www.afr.com/search.html?
ss=afr.com.au&text=WESFARMERS LIMITED

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3210AFE Advanced Corporate Finance, Irina Osmolovskaia, 5004826

Appendix

Appendix 1: Stock price

Date
19-08-16
18-08-16
17-08-16
16-08-16
15-08-16
12-08-16
11-08-16
10-08-16
09-08-16
08-08-16
05-08-16
04-08-16
03-08-16
02-08-16
01-08-16
29-07-16
28-07-16
27-07-16
26-07-16
25-07-16
22-07-16
21-07-16
20-07-16
Average

Open Price
42.85
43.27
42.86
42.46
42.60
42.76
42.14
42.30
42.50
42.70
42.56
42.82
42.57
42.90
42.93
42.80
42.51
42.35
41.93
42.00
42.11
42.27
41.51
42.51

Close
Price
43.03
42.98
43.22
42.64
42.60
42.59
42.46
42.27
42.48
42.54
42.33
42.58
42.55
43.01
43.00
42.93
42.82
42.50
42.59
42.25
41.80
42.04
41.91
42.57

Volume
1,387,970
2,168,600
2,125,600
1,577,000
1,332,100
2,273,400
1,382,800
1,627,400
1,550,400
1,683,400
1,552,000
1,764,800
1,740,700
2,373,900
1,489,300
2,902,200
1,987,700
1,489,900
2,995,600
1,761,100
1,342,300
1,993,900
1,902,200
1,843,664

Source: Australian Securities Exchange

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3210AFE Advanced Corporate Finance, Irina Osmolovskaia, 5004826

Appendix 2: Historical Risk Parameters and Beta

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3210AFE Advanced Corporate Finance, Irina Osmolovskaia, 5004826

Source: Bloomberg & Estimate

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3210AFE Advanced Corporate Finance, Irina Osmolovskaia, 5004826

Source: Bloomberg & Estimate

Appendix 3: Beta
Raw BETA
Adjusted BETA
ALPHA (Intercept)
Correlation^2
Correlation
Standard Dev of
Error
Std Error of ALPHA
Std Error of BETA
t-TEST
Significance
Last T-Value
Last P-Value
Number of Points
Last Spread
Last Ratio

0.819
0.879
0.154
0.423
0.650
3.485
0.416
0.115
7.108
0.000
0.492
0.688
71.000
5,519.43
0
0.008

Source: Bloomberg

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3210AFE Advanced Corporate Finance, Irina Osmolovskaia, 5004826

Appendix 4: Beta levered and Beta unlevered

D/E
Marginal Tax
Rate
Beta levered
Beta
unlevered*

2010
21.68

2011
19.26

2012
21.47

2013
22.21

2015
19.49

2016
26.34

30%

Avera
ge
21.74
30%
0.819
0.711

Source: Bloomberg & Estimate

Appendix 5: Cost of equity

Expected Market Return
Risk Free Rate
Country Risk Premium
Beta
Cost of Equity*

9.86%
1.91%
7.95%
0.833
8.53%

*CAPM = Rf + Beta * (Rm

- Rf)
Source: Bloomberg

Appendix 6: Moody's rating

Long Term Rating
LC Curr Issuer Rating
Senior Unsecured
Debt
Short Term

A3
A3
A3
P-2

Source: Bloomberg

Appendix 7: Debt/Equity Ratio

2010

2011

2012

2013

2014

2015

2016

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3210AFE Advanced Corporate Finance, Irina Osmolovskaia, 5004826

Total
Debt/Equity

21.68
%

19.26%

21.47
%

22.21
%

19.49
%

26.34
%

25.17%

Source: Bloomberg

Appendix 8: Capital Structure

Market Cap
ST Debt
LT Debt
Pref. Equity
Total

$M
46,858
.3
2,056.
0
4,226.
0
0.0
53,140
.3

%
88.2%
3.9%
8.0%
0.0%
100.0
%

Source: Bloomberg

Appendix 9: Cost of Capital

Equity
Debt Cost
Preferred Equity
WACC

Weig
ht
88.2%
11.8
0.0%

Cost
8.5%
2.23%
0.0%

WxC
7.5%
0.3%
0.0%
7.8%

Source: Bloomberg

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