In some respects the Wesfarmers’ full year (and interim for that matter) results were misleading.
After all, this is a company with a medium-sized export coal business based in Queensland, NSW and Western Australia, that has become a source of earnings volatility in recent years.
In the 2008 and early 2009 financial year record prices for coal, especially hard coking coal, boosted the group’s returns (and helped pay for the acquisition of Coles Group, for that matter).
Then the price cuts came from the start of April 2009 and they lasted until this March, pushing profits down more than 80% in the division in the 2010 financial year.
So the volatile earnings from coal limited Wesfarmers to a 2.8% rise in full-year profit for the June 30 year.
But exclude coal, and profits from the Coles’ retail business, and its other industrial and financial operations of Wesfarmers were up 31%, which is a good result.
And this year we will see the recent sharp rise in coal prices overpower the improvement expected from Coles and some other businesses, to produce a group performance that is again misleading.
Still shareholders shouldn’t complain.
They will get a higher payout of $1.25 for the year, up from $1.10 a share. The final was boosted to 75c a share, from the 60c paid in the final half of 2009.
The small rise in profit and concerns about margins in some of the Coles chains saw the shares sold off 2% in the wake of the Wesfarmers’ results being released.
But as investors had time to chew over the figures the losses were recalled and the shares finished off 31c at $31.44, a loss of less than 1% on the day.
Coles’ improvement is starting to take shape, but it has to be remembered that the improvement is coming off a lower base.
In the 2010 year Coles increased its earnings before interest and tax by 15.8%, Target was up 6.7% and Kmart boosted this line by almost a touch under 80%.
Earnings rose 10.5% in the Bunnings hardware business.
Earnings from the Resources division dropped 81.4%, significantly below a record result in 2008-09, due to ‘‘materially lower global export coal prices in the first nine months’’, a higher royalty expense and other costs.
Overall Wesfarmers reported net profit of $1.565 billion in the year to June 30, up from $1.522 billion in the prior year.
Wesfarmers chief executive Richard Goyder said, ‘‘Continuing improvement in our turnaround retail businesses was particularly encouraging.
"Progress is being achieved in building consumer trust through improvements in product quality, in-store service and value, as well as gains in supply chain efficiency and better working capital management.’’
Wesfarmers said earnings before interest and tax for the group were down 2.6% at $2.869 billion.
Wesfarmers said Coles supermarkets business ‘‘continues to make encouraging progress on its turnaround program".
But it just wasn’t a story about poor coal and improving Coles.
Wesfarmers other divisions did well.
It said the Insurance division recorded a 34.1% increase in earnings, following portfolio and business unit restructuring and an ongoing focus on underwriting and claims management disciplines.
Earnings for the Energy and the Chemicals and Fertilisers divisions, excluding restructuring costs and a non-cash impairment charge in relation to Coregas of $48 million, improved 36.0% and 132.7% respectively, with both businesses benefiting from a return to full gas supply for the year.
Subdued industrial markets, particularly in the first half, resulted in flat earnings for the year in the Industrial and Safety division. Trading conditions improved materially in the second half.
"The outlook for ongoing growth in the Wesfarmers’ overall businesses was encouraging, especially in the Resources division where the market fundamentals for high quality metallurgical coal were strong, and the coal price outlook, compared to prices in place at the commencement of the 2010 financial year, was positive," Mr Goyder said.
In fact if Coles and the other businesses continue to do as well, a bigger result from the coal division will see Wesfarmers pull down a cracker of a result, especially in the current half year.
Some analysts, such as those at Bank of America/Merrill Lynch, are forecasting along these lines this morning, a point picked up in some media commentaries on the results.
