Table of Contents

Contents

Introduction

Introduction of Wesfarmers Limited

Areas analyzed

Discussion on Corporate Governance

Calspers Tests

Ownership structure

Lenders

Financial market considerations

Societal Constraints

Conclusion

References

Appendix

Introduction

Introduction to Wesfarmers Limited

Wesfarmers Limited is a public conglomerate in Australia which has its headquarters in Perth, Western Australia. The company’s interest lies predominantly in New Zealand and Australia. The company is into the industry of conglomerate and deals in the products like retail, chemicals. Coal mining, industrial and safety products (Wesfarmers Annual Report, 2019). The company is the largest Australian company by revenue and also by the largest employer and employing around 220000 employees.

Areas Analyzed

The report is aimed at studying the corporate governance and financial market considerations. The ownership structure of the firm with its lenders and social constraints will be analyzed in the report.

Discussion on Corporate Governance

Calspers Tests

In CALSPERS test, the questions that are asked include:

  1. Are a majority of directors outside directors?

  2. Is the chairman of board independent of the company?

  3. Are the compensation and audit committee composed entirely of outsiders?

The company Wesfarmers makes sure that the board includes directors who have a mix of skills, commitment, expertise and diversity. The board has 10 directors at present that includes nine independent directors and are non-executive (Wesfarmers Corporate governance report, 2019).

The company’s chairman of board is independent and the position is filled being hold by Mr. Michael Chaney. The company selects a chairman from the independent non-executive directors.

The audit and risk committee of the company is entirely formed with the independent directors. Also, this committee is chaired by an independent director who does not hold the chair for the board. In the same manner remuneration committee includes a dependent director. Thus, it is not formed entirely with the outsiders. So, the company cleared the CALSPERS test as the company has majority of its board as outsiders.

Ownership Structure

Total share that has been allocated to the CEO of the company under the KEEPP performance for the company are 184,994. Half of the shares are restricted for trading for 5 years. The major shareholders of the company are two institutional investors that are BlackRock Group and the Vanguard Group. Blackrock group holds 6.04% of the overall shareholding while the Vanguard group holds 5% of the shares for the company. Also, the company’s largest 20 shareholders owns 53.44% of the shareholding overall. In overall shareholding only 1.05% of the shareholders are registered outside Australia (Wesfarmers Annual Report, 2019. Also, most of the institutional shareholders are from the country only.

Lenders

The company is rated by the two agencies that is S& P and Moody’s. Every year as per the stability or the financial condition of the company, both the credit rating agencies. The current rating of the company

Wesfarmers Limited rated by the two agencies that is S& P and Moody’s

At present the company’s credit rating states that the company is stable. For the historic credit ratings of the company:

historic credit ratings of Wesfarmers Limited

The company has a stable outlook from last 5 years as per Moody’s. According to Standard’s and Poor’s the rating went negative in between but the company recovered and has a stable outlook in the present too (Wesfarmers credit ratings, 2019). This help lenders knowing that the company has enough finances o handle the debt. Rating helps the lender understand the company financial health and accordingly they can lend to the business or invest in the business.

Financial Market Considerations

The company’s share prices are being followed by around 14 analyst and the Target price set by them at the present is at 40.28 AUD while the company’s last traded price is at 46.86 AUD (Yahoo finance, 2020). According to the consensus of analyst the company is underperforming at the moment.

In the 5 years of time the company’s share prices has varied. They were around 20 AUD in the year 2015 and has moved upwards to 46.86 AUD in the year 2020. The share prices in the last 5 years saw two major spikes that were in the year 2016 and then in 2017. After that price normalized and are growing at a normal rate. No major spikes happened in the prices of shares. But in late 2019, share prices of Wesfarmers saw a sudden fall due to pandemic but now the prices are improving. The share price fall is not related with the corporate governance of the company and the corporate governance policy is appropriate.

Graphical representation of share price movement over the years

Valuation

The company’s P/E ratio has varied over the years. It was highest in the year 2018 and lowest in 2019. In the year 2020 it has again regained its momentum. Return on equity was highest in the year 2018 and so was Return on Assets. The performance of the company has improved since the year 2018. The ratios shows combined with shares prices show that company is improving and has more chances to grow (Appendix 1).

The table shows combined with shares prices show that company is improving and has more chances to grow

Societal Constraints

The company has a positive societal image. In recent events the company was also mentioned in the news for innovative measures that have led to improved social and environmental outcomes. Also, for its products the company is continuously involved with the suppliers and do the audit actively for following the mandatory standards. The company is also striving to reduce its reliance on grid based energy and in turn reducing its carbon emissions (Wesfarmers Corporate Governance, 2019).

According to an analysis by Yahoo finance among its competitors Wes farmers has highest quality governance score of 3 while Incitec is at 2 and Orica is also at 2.

Conclusion

The company Wesfarmers is in the industry of conglomerate and has a positive results for the CALPERS test. The board is independent for the company. Most of the investors are from Australia and only around 1% are out of the country. The company’s rating is stable and as per the analyst the company is underperforming at the moment so the shares are to be brought and hold. The company’s P/E ratio has improved in the last year but ROA has reduced. So, company needs to focus more on it efficient use of assets. The company has the best quality governance rating in the market as compared to its peers. Thus, showing good values of the company.

References

Annual Report. 2019. Wesfarmers Annual Report. Retrieved from: https://www.wesfarmers.com.au/docs/default-source/reports/2019-annual-report.pdf?sfvrsn=c5e13cbb_2

Corporate Governance. 2019. Wesfarmers corporate governance report. Retrieved from: https://www.wesfarmers.com.au/docs/default-source/reports/2019-annual-report.pdf?sfvrsn=c5e13cbb_2 Wesfarmers. 2019. Credit ratings. Retrieved from: https://www.wesfarmers.com.au/investor-centre/debt-investors/credit-ratings

Yahoo finance. 2020. Wesfarmers share prices. Retrieved from: https://au.finance.yahoo.com/quote/WES.AX?p=WES.AX

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