Just last week, Sinon (Wesfarmers), a leading local retail group, announced the sale of struggling British Homebase and Bunnings hardware chains, with losses ranging from A $ three hundred and fifty two million nine hundred and ninety nine thousand nine hundred and ninety nine to A $ four hundred and five million nine hundred and ninety nine thousand nine hundred and ninety nine, including a private equity firm called Hilco Capital.
Since Hilco Capital only pays nominal value, the private placement is rumored to cost £1 (A $1.78) to buy Sinon`s assets in the UK, but in fact Hilco has to pay nearly A $2 billion a year for Homebase and Bunnings.
Sinon paid about A $700m to Homebase and Bunnings hardware chains two years ago and has invested nearly A $1.4 billion in its UK business so far this year.
Rob Scott, chief executive of Wesfarmers, said investment in the UK had been disappointing because of weak enforcement, post-takeover problems and worsening macro-environment and retail sales. Under the terms of the agreement, the buyer will acquire all of Homebase`s assets, including the Homebase brand, its store network, permanent property rights, property leases and inventories.
The announcement also showed that divestment under the terms of the agreement was in the best interests of Wesfarmers shareholders and would support the relocation and repositioning of the ongoing Homebase business.
Market investors have mixed views on the symbolic sale: some see it as a huge failure on the operational side of the company; others say the company has shed a heavy burden to help it develop in the future.
So what is the situation in the end, and what kind of development path will Xinong take in the future?
Concrete analysis
According to a report updated by Morningstar (Morningstar), a third-party rating agency, analysts estimate that Sinon will record an EBIT loss of about A $250 million in 2018, but financial data have since improved. As a result, analysts said the sale`s impact on Sinon was mainly temporary and maintained a fair value estimate of A $37.50 a share.
"on the whole, Sinon is one of Australia`s largest publicly traded companies and the largest retailer. It is headquartered in Perth, the capital of Western Australia. Sinon is Australia`s largest private employer, with about two hundred and twenty thousand employees across Australia. Total retail sales (excluding gasoline) for the year are close to A $50 billion, accounting for 18 percent of total retail sales in Australia. "
The company has also focused on expanding profit margins through improved supply chains in the new fiscal year. The company`s supermarket chain, Coles, is closing the gap with rival Woolworths`s pre-interest profit margin and sales per square meter.
The company`s main risks include increased retail competition, lower consumer spending for Australians and lower commodity prices. The US-based Costco`s entry into the Australian market has increased competitive pressure, but more importantly, the continued expansion of Aldi, a low-cost discount store, has structurally transformed the Australian food industry.
Investment viewpoint
Overall, Wesfarmers`s diversified portfolio provides strong risk resilience, with more than 90 percent of group revenues related to consumers in fiscal year 2017, and these businesses contribute more than 90 percent to EBIT. Other businesses involve resources, coal mines, agricultural and industrial gases.
"the company`s main advantage is the cost advantage of its major retail size. Since the global financial crisis, the company`s balance sheet has recovered and strong cash flows generate spending that drives capital growth.
The overall risk comes mainly from intra-industry competition and the deterioration of the overall retail environment. The company`s current trading price is A $45.52, higher than Morningstar`s fair value of A $37.5. "
