Across client accounts that have selected the “Growth” Australian Equity option we have purchased Wesfarmers (WES). Wesfarmers is a diversified business operating in home improvement and office supplies, resources, chemicals, energy and fertilizers and industrials and safety products. Until this month WES also owned and operated the Coles supermarket business which was demerged to existing shareholders.

We are positive on the medium-term outlook for WES for the following reasons:

• Bunnings, the hardware retailer and the largest business within the WES conglomerate is an excellent business with continued growth prospects, after the wind up of Masters;
• The demerger of COL has freed up significant capital and strengthened the balance sheet of WES, increasing the prospect for acquisitions or capital management;
• WES will retain the Department Stores and importantly the Officeworks business which shows continued strong revenue and earnings growth;
• The Industrials business will benefit from increased attention and focus with the possibility of an acquisition adding to the scale of the business;
• WES will retain 15% of the COL business, maintaining some exposure to a quality business.

The major risks facing WES are their ability to wisely allocate capital. The Target business has been problematic and despite early positive signs of turnaround will require more investment. Earnings may be more exposed to more cyclicality after losing the majority of the earnings contribution from COL.

To fund the purchase we sold Aurizon (AZJ) and Resmed (RMD). Both these businesses have significantly outperformed recent weak markets and are now considered to be fully priced compared to the valuations of the underlying business.