Wesfarmers’ Fair Value Estimate Anchored by Our Long-Term Lithium Forecast

We maintain our AUD 42 fair value estimate for shares in wide-moat Wesfarmers WES, which screens overvalued at current prices. Wesfarmers’ share in the Mt Holland project accounts for about AUD 3 per share, or 7%, of our fair value estimate in our base case. As more lithium supplies comes online over the next decade, we expect lithium prices to gradually moderate from current levels to around USD 15,000 per metric ton—in nominal terms. Our long-term lithium price forecast is based on our projections of mine supply and demand, mostly from electric vehicles. However, if lithium prices remained at around USD 50,000 per metric ton, our fair value estimate would increase by some 30% to about AUD 54 per share—all else equal.

We continue to expect a general retail slowdown as coronavirus-distorted consumption patterns normalise in 2023. We anticipate the rising cost of living due to higher mortgage rates and consumer price inflation to force households to lower their spending on nonessential items. Within Wesfarmers’ suite of businesses, we expect its department stores to be hit hardest. We forecast the department stores to account for 15% of group earnings in fiscal 2023.

While we anticipate do-it-yourself hardware sales to be more robust, the near-term outlook for consumer demand remains uncertain because of the speed of Reserve Bank of Australia’s interest-rate tightening. We anticipate a considerable lag between interest-rate hikes and their full impact on consumption. Already softening housing starts and falling property values could hurt Bunnings’ sales by more than we expect, but would be unlikely to materially change our long-term outlook for Australia’s largest home improvement retailer, and hence our intrinsic valuation. We estimate Bunnings to constitute 60% of the conglomerate’s earnings in fiscal 2023.

Please see our Industry Pulse “Australian Retailing: First-Quarter 2023″ published on March 22 for more details on the sector’s near-term outlook.