Brexit a "blow to Wesfarmers" says analyst

David Errington, research analyst at Merrill Lynch (Australia) has said Brexit damages Wesfarmers £340m investment in Homebase.

Errington criticised the Australian conglomerate for buying the 265-store UK DIY/garden centre chain last month, and now says Brexit is a "blow to Wesfarmers".

He added: "We believe the decision by Wesfarmers to buy a sub-scale home improvement business in the UK (to which Wesfarmers stated is the worst performing home improvement retail business in the world) could be seen as a poor one based on the financial returns we forecast to be generated. Now, post Brexit, we consider this business will further deteriorate. We have zero earnings contribution from Homebase in our forecast earnings with risks to the downside (losses soon could be recorded)."

He said "$2.5bn of shareholder value could be now lost".

At present, Homebase generates around £20m of Earnings Before Interest & Tax (EBIT), which we would expect to fall rapidly in the coming year (due to an expected sharp fall in UK home improvement spending).

"If Wesfarmers cuts its losses and eliminates any plans in the foreseeable future to grow Homebase, we believe the damage to shareholder returns can be isolated to the initial capital outlay (just under A$700m) and the capitalised value of the lease commitments (which we estimate to be around $2bn)."

He said the "worst case scenario" was: "Wesfarmers has put forward a plan to spend up to $1bn to refit, restructure and reposition the Homebase stores and customer offer (as Bunnings over the coming five year period). If Wesfarmers continues its current plans, and commits the capital to Homebase, we believe the operating losses will increase (due to the restructuring) and the overall value erosion to shareholders will escalate (capital loss and increased losses).  On this worst case scenario, the losses to shareholders could escalate rapidly and head toward $4bn. In the current economic outlook for the UK, any capital we see being invested into Homebase would be eroded in value rapidly." 

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