WES has reported a slightly better-than-expected 1H17 result, with EBIT of $2.4b.
Coles’ earnings were disappointing, declining by 2.6% on headline basis or 6% after adjusting for one-off property sales. At a group level, the strong result from the industrial division and Bunnings off set the weakness in Coles.
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With Coles accounting for 40% of earnings, we believe group earnings growth will be moderate (3 – 4%) and full value for the stock is $40 – $43.
FY18 we assume revenue of $71.b, EBITDA of $5.9b, Net Profit $3.1b, EPS of $2.70 and DPS of $2.10 placing the stock on a forward yield of 5.5%
With the above in mind, we are selling covered calls over WES and a combination of the dividend and option premium is generating 10 – 12% annualized cash flow.
