January 11, 2011WesfarmersCoal forecasts too highQuick Comment ?...

January 11, 2011

Wesfarmers

Coal forecasts too high

Quick Comment ? Investment Conclusion: We remain Underweight WES, as we see downside to consensus earnings estimates because coal forecasts look too high. While the coal pricing outlook should improve from 4Q11, we think that consensus currently underestimates the impact of:
(i) risk of even lower production,
(ii) rising cash costs and
(iii) a stronger AUD.

While WES? resources division contributes only ~13% of
valuation, we?d note that movements in coal earnings
have in the past had a disproportionate impact on WES?
share price. We retain our A$32 price target.

Curragh production guidance looks optimistic: If we
assume production at Curragh resumes on February 1
(which could end up as a best case), Curragh will need
to deliver record production in 4Q to achieve the bottom
end of the current 5.8-6.2mt guidance range. Historically
WES? 4Q11 production has been 1.74mt. Our F2011 5.8mt production forecast assumes 4Q production of 1.83mt.

What?s new: WES announced that 3Q11 metallurgical
coal pricing will be US$221 per tonne, in line with our
US$225 estimate. Following the Queensland floods, we
reduce our production forecast for F2011 to 5.8mt (from
6.45mt) and update our coal pricing forecasts. We raise
our 4Q11 met. coal forecast from US$235 to US$300 per tonne. We reduce our coal EBIT forecast from US$448m to US$412m, vs. consensus at US$547m. Our WES EPS forecast goes from A$1.82 to A$1.80.

What?s next: WES will report 2Q11 retail sales on
January 31. We?d expect that WES will likely update the
market as to when the Blackwater rail line opens again.
Currently, WES expects it to open before ?mid-January?
at the earliest.

Prefer Woolworths: We prefer WOW to WES at current
levels, given: (i) its greater exposure to staples retailing,

(ii) signs of food inflation remerging and (iii)
undemanding valuation at 14.8x F2011 EPS. While our
WES valuation represents 2% upside, we remain UW,
as we see risks to consensus earnings forecasts.