Chanticleer

Coal not Coles drives Wesfarmers upgrade

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Jan 18, 2017 – 11.45pm

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Coal rather than Coles was behind Wesfarmers' earnings upgrade on Wednesday, which is a reflection of the surge in commodity prices and improved productivity since chief executive Richard Goyder had to rein in analysts' expectations just three months ago.

It is also good timing for the conglomerate, which is expected to post its first drop in food and liquor sales since it acquired Coles in 2007 as it takes on a reinvigorated Woolworths.

Woolworths this week appointed Tesco executive Claire Peters to head its supermarkets business, the role previously held by chief executive Brad Banducci. It is still unclear how much of a threat she will be to Coles, but freeing up Banducci to focus on running the entire company is a good thing and Woolworths is clearly on the road to recovery.

Wesfarmers managing director Richard Goyder. Philip Gostelow

Wesfarmers, which has been kicking itself for not selling the coal operations at the top of the cycle, put the assets up for sale last year.

The resources arm is now expected to deliver pre-tax profits between $135 million and $140 million for the first half. This is higher than earlier guidance for a break-even result.

Wesfarmers says the stronger earnings reflect improved productivity which helped it take advantage of stronger coal prices. Improved shipping timing and higher prices at its Curragh and Bengalla operations also helped.

While analysts are expected to upgrade their forecasts after winding them back just three months ago, the figures were not a huge surprise to the market, which was reflected in the modest share price rise.

The earnings mix at Wesfarmers is in contrast to this time a year ago, when it was the underperforming industrials business that was weighing on the company after a prolonged period of strong earnings growth out of the retail divisions.

All eyes will be on the performance of Coles when it releases its next set of sales figures alongside the first-half results in February.

Coles managing director John Durkan has said he will not react to short-term initiatives by competitors such as Woolworths and Aldi, but the supermarket group will do everything it can to protect its position.

Michael Smith is the North Asia correspondent for The Australian Financial Review. He is based in Tokyo. Connect with Michael on Twitter. Email Michael at michael.smith@afr.com