Analysts react to Wesfarmers' Homebase strategy

Financial analysts have reacted generally favourably to Wesfarmers' plans for its £340m British retail purchase, Homebase.

New owners Wesfarmers spelled out plans for UK DIY/garden centre chain Homebase this week, with store growth as a one-stop shop selling ranges that have more trade products at "everyday low prices" and a rebranding as Bunnings with a look that is close to the Australian DIY/garden business.

Analyst Citi Research said: "Wesfarmers' Strategy Day provided clear direction.  The plans for Target and Homebase (UK) look promising. We think Wesfarmers is a mid-single digit Earnings Per Share (EPS) growth company medium term. We maintain a Sell with a Target Price of $36.50.

"Homebase quick wins — Homebase sales per sqm is 58 per cent lower than Bunnings. According to the company it has the lowest sales productivity of any home improvement retailer in the world. By simply lifting sales productivity by 10 per cent, Homebase margins could rise 220bp, adding 1.6 per cent to group earnings. Bunnings would take back concession areas, shift to low prices every day and increase inventory density, which could all be done in a relatively short space of time. 

Credit Suisse said: "Bunnings emphasised a measured approach to its UK strategy, which reduces the risk of significant profit downside within its new UK business. We treat the UK as optionality and have no material profit change in our forecasts.

Credit Suisse warned on "low profitability and/or rent expense of Target and Homebase", which could "risk of a credit downgrade. We don't see a one notch downgrade as an issue."

Morgan Stanley said: "Homebase targets re-affirmed. Four months into the Homebase acquisition, Wesfarmers is more confident on the potential for the business despite its challenges. Management again reiterated the opportunity given how poorly the Homebase business has performed, drawing parallels to the McKewans business that it bought out of receivership which the Bunnings business was created from. Pilot Bunnings stores will be rolled out in the UK before Christmas and only when those stores are proven will the full conversion process take place."

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