The impact of the Coles Group takeover and the surge in coking coal prices were all through yesterday’s interim profit figures from Wesfarmers.
Shareholders had better take note of the flood of profit from coal, because it won’t be there in the back quarter of the June year and won’t be there in a year’s time with prices set to fall by 40% to 60% from April 1.
But the contribution from Coles will be there and all you can say about it is that there’s still a long way to go for Wesfarmers and its new main business.
The company reported net profit of $879 million in the six months ended December from $601 million in the first half of the 2008 financial year.
That was at the top end of the company’s guidance last month of earnings between $850 million and $880 million.
The shares finished slightly higher at $16.23, despite Wesfarmers cutting the interim payout to 50c a share from 65c and warning of further downward pressure to come while it repays some of the debt taken on by it the Coles purchase.
CEO Richard Goyder said in a statement that despite the impact of a tougher consumer environment, the group’s retail businesses have generally weathered the downturn well and the Coles turnaround is gaining momentum.
The Coles supermarket business saw earnings before interest and tax (EBIT) more than triple to $431 million from $130 million a year earlier on a full six month contribution from the business.
Earnings from resources for the half rose on the back of record coking and thermal coal prices for production from its three mines. EBIT hit $686 million against $112 million a year earlier.
Energy earnings, which include its liquefied natural and petroleum gas businesses, fell 38% to $30 million, while EBIT from the chemicals and fertiliser business slumped 92% to $4 million, thanks to soaring prices on world markets for fertilisers and their raw materials, and the impact of the WA gas disruption in July and August of last year.
The home improvement and office supplies unit, which includes Australia’s biggest hardware retailer Bunnings and Officeworks, had a 19% rise in EBIT to $395 million.
Insurance earnings for the half rose 4.7% to $67 million (but will have a hit of over $12 million from the Victorian bushfires this half).
The Kmart discount department stores business and the Target chain had vastly different experiences: Kmart EBIT fell 26% to $75 million while Target’s EBIT jumped 82% to $215 million.
The Industrial & Safety unit, which sells workplace equipment ranging from tools to clothing, recorded an 11% rise in earnings to $68 million.
“Our turnaround retail businesses are generally performing well despite the challenging conditions,” Mr Goyder said.
“Particularly pleasing are the signs that the turnaround in Coles is gaining traction. In the second quarter of the financial year, Coles’ Food and Liquor comparative store sales growth was 3.8 per cent compared with 1.3 per cent in the first quarter.
“The business achieved a record Christmas trading period driven by its fresh offer. We’ve also seen the upward trend continue since 31 December 2008.
"Bunnings’ earnings before interest and tax (EBIT) was up 13.8 per cent, driven by strong performances across all States.
“Bunnings has again delivered an impressive result as it continues to focus on strengthening its customer offer and delivering ongoing operational efficiencies.
"Store-on-store growth in cash sales of 7.7 per cent was achieved and good sales and earnings have continued post 31 December 2008.
"In a tight market, Officeworks’ retail store sales were up 3.9 per cent, a pleasing result in the conditions which reflects increasing traction of newly implemented growth strategies.
"Target continued to perform solidly, with 4.0 per cent comparative store sales growth during the period and an EBIT to sales margin of 10.3 per cent."
But the biggest influence on second half results will be export coal prices.
"Achievement of targeted sales volumes will, as always, require satisfactory mine, rail and shipping performance.
"Expected full-year sales of metallurgical coal at Curragh (In Qld) is in the range of 6.5 to 6.9 million tonnes for the 2008/09 year.
"Negotiations to renew the annual price of Curragh metallurgical coal will progress over the next few months, with most price resets taking effect at the beginning of April.
"The significant downturn in global steel production that has occurred in recent months will affect metallurgical coal prices and demand.
"The division’s earnings will also be impacted in the second half by the lag between coal prices and Stanwell (power station in Qld) rebate payment obligations as well as the division’s foreign-exchange hedge-book."
More than anything else, the performance of the coal business will determine just how well Wesfarmers negotiates the slowdown over the remainder of 2009.
The performance of Coles and Bunnings will not have the same influence on the company’s earnings outlook this year, but they will from 2010 onwards.
