Huntleys' Stock of the Week

Recommendations: Accumulate

WES's current stock prices

Investment Rating

WES is one of the major Australian corporate success stories and one of our Best Business selections. From a collection of basically unrelated operations WES has created an efficient cash generating machine that funds expansion of the asset base without recourse to shareholders while maintaining a high payout ratio. A premium multiple results from the combination of strong cash flow generation, solid NPAT growth and a focus on the creation of shareholder wealth over the long term. The balance sheet is actively managed to maintain capital efficiency. The EPS and DPS track record is solid. The acquisition of Coles Group has the potential to underwrite solid earnings growth over the next decade although there is hard work ahead to maximise returns to shareholders. WES is an ideal stock for patient long term growth and income investors.

Event

- Impact of Varanus Island Gas Disruption

Impact

- At this stage the "best estimate is that the pre-tax impact on Group profit will be up to $20 million per month at the current level of gas supply."

- CSBP - Chemicals & Fertilisers - has suspended production of ammonia and sodium cyanide.

- A shipment of 23,000 tonnes of ammonia is due late June, this shipment should produce sufficient AN for the mining sector into early August. Gas shortages are expected until August although further delays would not surprise.

- The impact of FY08 NPAT estimate of $1.07bn is up to $35m excluding insurance recoveries. The FY09 NPAT forecast of $2.075bn could be reduced by up to $55m should gas shortages run through to end October.

- This is a minimal impact and hardly justifies a reduction of $1.0bn in market capitalisation.

Recommendation Impact (Last Updated: 25/06/2008)

No change to our NPAT estimates or fair value. We retain our Accumulate recommendation.

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