Questions of the Week – Wesfarmers and G8

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Question: With the demerger of Coles from Wesfarmers (WES), am I correct in assuming that the Wesfarmers share price will fall by the amount the Coles share price lists at, assuming all things are equal? Also, Wesfarmers is trading close to all time highs, not seen for a while. Is it time to take profits?

Answer (By Paul Rickard): Yes, in relation to the demerger of Coles from Wesfarmers, the Wesfarmers (WES) share price will fall by the approximate value of a Coles share. This will occur on the day it goes “ex-demerger” – probably a week or two before the new Coles shares list on the ASX.

In regards to Wesfarmers, I am with the analysts (but not the market) in thinking Wesfarmers is overvalued. According to FN Arena, the consensus target price is $47.41, an 8.3% discount to the last price of $51.68. There are five neutral recommendations and two sell recommendations. It is trading on a multiple of 18.9 times FY19 forecast earnings and 18.9 times FY20 earnings. I liked Wesfarmers in the low $40s, but I’m not a huge fan in the low $50s.

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