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Brexit leaves question mark over Bunnings' UK investment

Homebase Bingley

A recent report from Bank of America Merril Lynch (BAML) states that Wesfarmers could face heavy losses due to the acquisition of Homebase, as political and financial uncertainty is likely to push the UK economy into a recession.

BAML analyst David Errington was quoted as saying, “If Wesfarmers cuts its losses and eliminates any plans in the foreseeable future to grow Homebase, we believe the damage to shareholder returns can be isolated to the initial capital outlay (just under £340 million) and the capitalised value of the lease commitments (thought to be in the region of £1bn).

“Wesfarmers has put forward a plan to spend up to £500m to refit, restructure and reposition the Homebase stores and customer offer over the next five years. If Wesfarmers continues its current plans, and commits the capital to Homebase, we believe the operating losses will increase, due to the restructuring, and the overall value erosion to shareholders will escalate.”

“If Wesfarmers elects to push on with its plans to spend £500m in restructuring the business, the capital lost to shareholders would grow up to £2bn,” he added.

“In our view, it will be many years before Homebase generates any or reliable profit and hence we believe the initial investment Wesfarmers made has a zero value,” Errington commented.

“The housing market is likely to suffer in this environment and we would expect the consumer discretionary market Homebase operates in to contract sharply,” he said.

He added: "We believe the decision by Wesfarmers to buy a sub-scale home improvement business in the UK (to which Wesfarmers stated is the worst performing home improvement retail business in the world) could be seen as a poor one based on the financial returns we forecast to be generated. Now, post Brexit, we consider this business will further deteriorate. We have zero earnings contribution from Homebase in our forecast earnings with risks to the downside (losses soon could be recorded)." He said "£1.25bn of shareholder value could be now lost".

“The UK home and garden market growth has been low for an extended period and has recently recovered to around 1 per cent. The euro crises of 2010/11 coincided with a detraction in sectors correlated to consumer cyclicals (such the home and garden market). During this period, the home and garden market contracted by around 0.5 per cent. Interestingly, this had the effect of reducing EBIT by around 25 per cent for Homebase and B&Q (on an indexed total EBIT basis).”

Wesfarmers declined to comment.

Source: Insight DIY Team

27 June 2016

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