Morgan Stanley said Wesfarmers' acquisition of UK retailer Homebase represented its first offshore foray, adding: "While success executing on the turnaround and Bunnings rebrand is unlikely to change the WES investment case, it could potentially deliver a growth avenue, in our view."
Morgan Stanley said: "Retailers tend to be bad travellers. We'd argue that retailers (not just Australian retailers) tend to travel poorly given differing consumer preferences, cost bases, a general lack of awareness of foreign concepts, local zoning and store planning regulations and as management focus is split. Retailers also, in our experience, tend to overestimate their credentials and the benefits of incumbency. However, if any Australian retailer has earned the right to operate offshore, we think its Bunnings given its very strong track record in the Australian market.
Morgan Stanley UK retail analyst Geoff Ruddell said the UK home improvement market was quite different to Australia. He noted the UK home improvement market was shifting towards 'Do It For Me' from 'Do it Yourself', that trade players had performed considerably better than DIY retailers, such that the 'trade' market represents c.64 per cent of the wider home improvement market, compared to Australia where trade represents c.57 per cent. The opportunity for Bunnings in the UK, he argued, was to take share from existing trade players, like Travis Perkins, Jewson, Wolseley and Howden, where margins tend to be lower.Morgan Stanley said Bunnings had bought a "blank canvas" in Homebase. Analysing the state of the Homebase business was "meaningless", in Morgan Stanley's view, "given how significant the changes are that Bunnings intends to make to the store footprint, range, pricing and management". The firm did, however, highlight the scale of the challenge for Bunnings given the significant amount of change required, very low awareness of the Bunnings brand in UK (12 per cent in Morgan Stanley's survey), high existing rents and, on average, long-term leases.
"Given the Homebase acquisition represents just six per cent of group financial year 2016 end capital employed and even on our financial year 2020 estimates is just five per cent of group profits, it's difficult to see performance either way significantly affecting the Wesfarmers' share price. However, as management focus shifts to the UK (and potentially away from Australia) we see the potential for the strong performance posted over the past 15 years to slow, which could see investors de-rate the stock given the Australian Bunnings business would have a larger impact on the WES' share price, in our view."
Meanwhile, independent analysis of Homebase shows it now has the cheapest prices across a range of selected products, having overtaken B&Q and Wickes since Wesfarmers took over, with Wyevale Garden Centres about 30 per cent more expensive.
Research by hardware intelligence group InsightDIY last month ranked a basket of goods purchased at Homebase against key competitors B&Q, Wickes and Wyevale. It compared a basket of gardening goods to a similar basket bought in April 2015.
"Comparing April 2016 to April 2015, the B&Q basket has decreased by one per cent, Wickes has reduced by 10 per cent, Homebase has dropped by a whopping 21 per cent and Wyevale increased their prices by four per cent,’’ the InsightDIY report said.