Australia’s Wesfarmers posts record profit as diversification pays

SYDNEY: Australian retail-to-mining conglomerate Wesfarmers Ltd withstood fierce competition on its supermarket chain and rode on higher coal prices to a record annual profit, underscoring the defensive appeal of its diversified business structure.

The strong result from Wesfarmers’ coal unit will likely quell investors’ hopes for its sale anytime soon, as it insulated Australia’s biggest company from weakness in supermarkets resulting from stiff competition and bad weather.

Wesfarmers shares jumped as much as 3% to a three-month intraday high in a flat overall market, as investors cheered what Argonaut Securities senior broker James McGlew called a ”vindication” of the firm’s complex business model.

The owner of Australia’s No. 2 grocery chain Coles, department stores Kmart and Target plus a host of mining and industrial assets said underlying net profit leapt 28% to A$2.87 billion (US$2.27 billion) in the year to end-June, just shy of analyst forecasts of A$2.90 billion.

The result belied a 13% decline in pre-tax profit from its biggest division, Coles, as a fierce price war with larger Woolworths Ltd and insurgent German discounter ALDI Inc squeezed margins already under pressure from a cyclone which damaged crops in Queensland state.

It was the coal unit, which upped production by 11% and swung to a A$405 million pre-tax profit, from a A$310 million loss the prior year, which made the biggest contribution to earnings. Australian coal prices in 2017 rose to levels nearly three times the average price of 2016.

Wesfarmers has been trying to sell one of the country’s biggest coal mine portfolios to focus on retail, although discussions have so far ended without a deal due to disagreements over price.

Including large one-off writedowns on its Target and coal assets the previous year, the net profit amounted to a 606% jump from the previous year’s A$407 million.

The pre-tax profit from Coles was also dragged down by the sale of its credit card unit to Citigroup in February, the company said.

Still, chief executive officer Richard Goyder warned of continuing pressure on grocery margins. He said Wesfarmers would respond ”rationally” to competition from Woolworths and ALDI.

Wesfarmers declared a final dividend of A$1.20 per share, up from A$0.95 a share last year, its highest since 2014. - Reuters