Analysts react to Homebase/Bunnings annual results

Bunnings UK and Ireland recorded a £54m loss in the first full year of Wesfarmers ownership and analysts say high return on capital is unlikely, while successful roll-out of rebrands is essential for the future.

Citi analysts said Bunnings UK&I Return on Capital (ROC) will to reach 10% long term after the year ending 30 June results were announced. "With losses mounting in the UK, an 18% return on capital appears to be a stretch target for management. We expect Bunnings UK&I ROC to hit 10% by Financial Year 2025 end, achieving its cost of capital. This is on a smaller store base and with a 5.5% EBIT margin. In order for an 18% margin to be achieved, the store network would need to shrink materially, concentrating on the higher quality sites in the network."

Morgan Stanley said Bunnings UK "still appears a work in progress; Homebase trading is weaker than expected. Homebase gets heavy investor focus, yet we think the Bunnings pilots (i.e., the future of the business) are far more relevant. Bunnings intends to have 15-20 stores rolled out in the UK by the end of December, so in 12 months' time, its outlook will be far clearer."

Deutsche Bank said Wesfarmers Home Improvement divisional EBIT (including UK) at $1,245m, was 5.4% below Deutsche Bank forecast at $1,316.4m.

Bunnings MD Michael Schneider reported revenue of £1.2bn for the year and a loss of £54m before interest and tax. Quarter four 2017 sales decreased 6.8% in local currency terms.

There was "significant disruption" caused by repositioning as 15-20 rebranded Homebases become Bunnings by the end of the year. "Challenging trading" continues. New UK leaders including David Haydon and Damien McGloughlin are coming in.


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