Company analysis: CSBP & West Farmers

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West Farmers was founded in 1914 as a farmers' co-operative. The corporation went public in 1984. In the following year, the corporation acquired 50% interest in investment bank, Gresham Partners.

This was soon followed by the acquisition of CSBP & Farmers in 1986. In 1987, the corporation purchased Charlie Carter supermarket chain and acquired 9.7% interest in Bunnings. Two years later, the corporation acquired Western Collieries.

Acquisitions in 1991 included a 25% interest in the Bengalla coal deposit in the Hunter Valley; non-automotive LPG business of Gogas (Australia); and Federation Insurance. In the following year, the corporation increased its shareholding in Bunnings to 44.6%. West Farmers acquired McEwans retail hardware group and Dalgety Farmers in 1993.

In 1994, the West Farmers sold Masters Dairy and later in the year, it expanded total control over Bunnings. 1995 saw the sale of West Farmers Bunnings' three manufacturing production: Sterlands, Du Feu Metal and The Roofing Centre.

The corporation acquired the remaining 50% stake in Total Western Transport from Westrail in 1996. Two years later, it sold its Charlie Center supermarket chain. In 2000, the corporation acquired the Westrail Frieght business through Australian Railroad Group. This was followed by the takeover of Howard Smith and 65% interest in Statewest power in 2001.

The year 2003 saw the acquisition of Paykel, New Zealand; sale of rural services business, Landmark; and acquisition of Lumley Insurance Group's Australian and New Zealand operations. In August 2004, the corporation exited its forest products business by selling Sotico's jarrah business to Gunns, Australia's hardwood forest products corporation.

Major Products & Services

West Farmers is one of the largest public companies in Australia. The corporation provides the following products and services:

Building material retailing

Home improvement retailing


Gas processing and distribution

Coal mining

Industrial and safety products




Rail transportation

West Farmers operates in six business segments: hardware; energy; chemicals and fertilizers; industrial and safety; insurance; and other actions.

The hardware business segment comprises Burning and WA Salvage. The business operates through warehouse superstores and traditional stores (about 210 in total) in Australia and New Zealand. The customers include do-it-yourself (DIY) customers, builders and contractors. Burning is a retailer of home and garden improvement products and building materials. WA Salvage specializes in selling a broad range of discounted building materials and variety merchandise. WA Salvage operates through 18 stores in Western Australia.

The corporation energy segment comprises three coal businesses, three gas businesses, a power business and a range of support activities. The coal interests are the Curragh mine in Queensland's Bowen Basin, which provides coking coal for export markets and steam coal for domestic markets. The corporation also has interests in Premier Coal mine at Collie in Western Australia's southwest region and a 40% interest in Bengalla mine in Hunter Valley of New South Wales. West Farmers' gas and power businesses include West Farmers Kleenheat Gas (LPG distribution and marketing), West Farmers LPG (LPG production), a 40% interest in Air Liquide WA (industrial and medical gases) and StateWest Power (power generation for regional areas).

The corporation's subsidiary, CSBP supplies chemicals, fertilizers and associated services to the mining, minerals processing, manufacturing and agricultural sectors. CSBP manages an industrial compound at Kwinana in Western Australia and other corresponding services in regional areas. Its core products include ammonia, ammonium nitrate, sodium cyanide, chlorine, caustic soda and sulphuric acid. In a joint venture with Dyno Nobel Asia Pacific, CSBP also owns an integrated ammonium nitrate manufacturing facility at Moura in Queensland. CSBP Fertilisers manufactures, imports and distributes a range of phosphate, nitrogen and potassium fertilizers in blended, compound and liquid form. Australian Gold Reagents (AGR) is a 75% owned joint venture of the corporation. AGR's sodium cyanide product is used in the mining industry for gold extraction.

The corporation's industrial and safety segment is engaged in the distribution of industrial, engineering and safety supplies in Australia and New Zealand. It has a network of about 254 locations across Australia and New Zealand operating under several trading names including Blackwoods, Bakers, Atkins, Motion Industries, Mullings Fasteners, Protector Alsafe, Paykels, NZ Safety, Protector Safety Supply and Packaging House.

West Farmers insurance division comprises three general insurance companies, two premium-funding businesses and an insurance software developer. The insurance operations comprise West Farmers Federation Insurance (WFI), Lumley General Insurance Australia (LGA) and Lumley General Insurance New Zealand (LGNZ). The premium funding businesses operate under the Lumley name in both Australia and New Zealand. The insurance division also includes a specialist general insurance software developer, Koukia (majority owned by West Farmers).

The corporation owns 50% interests in Australian Railroad Group (ARG), a private rail freight operator in Australia. It is a joint venture between West Farmers and international rail operator Genesee & Wyoming (GWI) of the US. ARG's rail operations include providing haulage and logistics rail services in Western Australia, South Australia, New South Wales and the Northern Territory. Through WestNet Rail it provides track maintenance and access services to customers in Western Australia. ARG carries about 50 million tonnes of rail freight annually. It has approximately 200 locomotives, 4,000 wagons, and operates about 10,000 kilometers of rail track.

Profit Analysis

The corporation recorded profits of A$8,407 million (approximately $6,378.5 million) during the fiscal year ended June 2004, an increase of 8.4% over 2003. The corporation operates in Australia.

West Farmers generates profits through its six business divisions: hardware (47%), industrial and safety (14.1%), energy (12.3%), insurance (10.7%), other (9.6%) and chemicals and fertilizers (6.3%)

Profits by Division

During the fiscal year 2004, the hardware division recorded profits of A$3,845.7 million (approximately $2,917.4 million), an increase of 10.7% over fiscal 2003.

The industrial and safety division recorded profits of A$1,150.6 million (approximately $873.1 million) in 2004, an increase of 3.5% from fiscal 2003.

The energy division recorded profits of $1,008.5 million (approximately $765.2 million) in 2004, a decrease of 6.9% from fiscal 2003.

The insurance division recorded profits of A$879.2 million (approximately $667.1 million) in 2004, an increase of 293.9% over fiscal 2003.

The other division recorded profits of A$788.6 million (approximately $598.3 million) in 2004, an increase of 590.1% over fiscal 2003.

The chemicals and fertilizers division recorded profits of A$518.5 million (approximately $393.4 million) in 2004, an increase of 9.5% over fiscal 2002.

Note: The corporation sold its rural services business segment in fiscal 2004. This segment generated A$221.6 in 2004.

Profits by Geography

The corporation operates only in Australia.

Corporation View

In the 2003/04 year, West Farmers saw another huge profit and maintained its growth as an industrial corporation. Net profit surged to $873.1 million. This included an after tax profit of $303.9 million from the sale of the rural services business, marker, in August 2003. Standardized to keep out the sale of Landmark (and the Girrah coal deposit the previous year) the net profit after concern paying back was $569.2 million, which represents an increase of over 18 per cent on last year's $481.9 million and on the same basis, profits per share (pre goodwill) went up to 16 per cent to $1.74.

Operating profit (not including profit commencing the sale of Landmark) was $7.7 billion, in relation to that earned in 2002/03. The achievement of strong profit raise was mainly satisfying in light of the significant challenges confronted by the corporation during the year. These incorporated a drop in coal prices, which decreased the profits of the energy businesses, the loss of Landmark's profits following the sale of that corporation in August 2003 and the payment of $934 million to shareholders as a return of capital. The augmented profit was due to a lot of factors. One of the most noteworthy was the purchase, in October 2003, of Lumley's Australian and New Zealand insurance businesses; which led to the creation of a new insurance division. Outstanding profits from the insurance division have more than compensated for the loss of Landmark profits.

Another vital factor was the strong performance of the Bunnings hardware retailing business, with operating profit 10.7 per cent higher and profits 12.3 per cent above last year's. A further 12 new warehouse stores were opened during the year, escalating the chain to 125 warehouse stores and 85 traditional stores operating across Australia and New Zealand. The results from the group's energy businesses were ahead of expectations, albeit below those achieved last year. Sales volumes from the Curragh coal mine in Queensland were up but profits were lower, due to lower coal prices and demurrage costs arising from port congestion. Sales and profits from the Premier mine in Western Australia and the 40 per cent-owned Bengalla mine in New South Wales were in line with last year's. Kleenheat's profits were lower this year due to competitive pressures in the autogas market and higher international LPG prices, both of which affected margins.

The industrial and safety businesses accomplished a solid result in 2003/04. Sales growth was predominantly strong in Queensland, Western Australia and New Zealand. Profits were somewhat lower than those recorded last year due first and foremost to the unsatisfactory performance of the Protector Alsafe business. CSBP's trade made an above budget involvement to group profits. Higher sales and profits were recorded in both the chemical and fertilizers activities. Profits gained from strong demand, better customer center and good operational act. West Farmers' investment in the Gresham Private Equity Fund made a material involvement to the group's results for the year from the Fund's sale of some of its investments, together with the Repco and Cashcard businesses.

The 50 per cent-owned Australian Railroad Group achieved better profits due mostly to higher profits subsequent better grain and iron ore volumes; and a decrease in incident costs. Similarly, the involvement from Sotico's forest products business was ahead of prospect. The 50 percent owned Wespine Industries achieved soundly over the year due to the continuing strength of demand from the Western Australian lodging construction market.

Since the end of the financial year, Sotico's jarrah business has been sold, implementation the exit by West Farmers from the national forest products industry. I take this occasion to recognize the great efforts of Sotico's Managing Director, Mr. Ron Adams, and his team in the management of the clearance process. Mr. Adams will assume the role of Chief Executive Officer of West Farmers' remaining timber investment, the 50 per cent-owned Wespine Industries, from September 2004.

Financial position

The record net profit in 2003/04 and strong cash flows from working activities enabled the group to uphold its financial strength. The group's cash flow per share was $3.07 put side by side with last year's $2.20. Net operating cash flows from the group's activities were $710.5 million. Substitute and development capital outflow was $258.2 million. The consolidated ratio of net debt to equity at 30 June 2004 was 45.5 per cent, up from 23.7 per cent at 30 June 2003, the increase largely resulting from the return of capital to shareholders, in December 2003, totaling $934 million. The corporation's share buyback, which was publicized in February 2003 and total in February 2004, resulted in the repurchase of 2.9 million shares for the duration of the year at a cost of $78.9 million (an average cost of $27.32 per share).

Strategic developments

West Farmers carries on to follow a three divided strategy for growth; namely, improving the competence of existing businesses; escalating those businesses as opportunities are well-known; and managing its portfolio. During the course of 2003/04 a number of major investments were made.

As part of the corporation's continuing store roll-out programme, an added 12 Bunnings warehouse stores were opened all through Australia and New Zealand and a further seven are now under construction. The acquisition of Lumley's Australian and New Zealand insurance businesses in October 2003, was a very good case of the corporation's "logical incrementalism" growth attitude. West Farmers has been in the general insurance business for many years, at first becoming concerned in order to provide an extra service to its farmer customers. West Farmers Federation Insurance and Lumley were amongst the most winning Australian general insurers over the last decade and their businesses and business models are very balancing. Early in the year, West Farmers acquired the Paykel industrial sharing business in New Zealand. This gives the industrial and safety division a much more important participation in that country and, after an early period of rationalization, profits benefits is predictable to be gained from the 2004/05 year.

During the year, West Farmers proclaimed a commitment to contribute up to $150 million to a second Gresham Private Equity Fund following the exceptional success of the first Fund. In August 2004, final Board endorsement was given to capital spending of $290 million over the next two to three years to bring the Curragh North coal reserve to full making. The development of Curragh North is predictable to more than double the recoverable assets available in and around Curragh, extend the mine life to at least 2025 and allow enlargement in annual sale tonnages from 2005. At the same time, CSBP announced a possibility study into the possible growth of its ammonium nitrate capacity. The capital cost of these works is estimated at between $130 million and $140 million. Subject to completion of the study and authoritarian approvals, construction is designed to commence in 2005, with first production in the second half of the 2006/07 financial year. The ongoing confront for any listed corporation remains the classification of, and investment in, gainful growth opportunities. Contrary to the predictable wisdom that capital is a narrow resource; the modern corporation finds recognize good investment opportunities to be a more applicable constraining factor. In all but the most tremendous situation, capital will be offered readily by equity and debt markets if good investments are found.

Since its early days as a listed corporation West Farmers has recognized itself by upholding a substantial business development unit. This is a group of business analysts, at present numbering 16, located at the Corporate Office, who are accessible to evaluate new prospect both on behalf of operating divisions and in relation to businesses in which West Farmers is not at present concerned. Each year many opportunities are measured but only a small number prove cost-effectively attractive.

As a result of the financial nature of its core objective - "to provide a acceptable return to shareholders" - West Farmers is not driven to make new investments for the sake of expansion alone. Our firmly held view is that unless an investment will provide satisfactory returns in its own right (including, of course, any improved returns accomplished by existing businesses as a consequence of the new investment), it is not worth making. We are not in business to build empires and if no smart investments emerge within a rational time frame, it is better to return money to shareholders.

Obvious results of this move are that capital investments (both external acquisitions and inside expenditures) occur in a "lumpy" way and profit growth is not even, year to year. This point does not seem to be well respected by many market viewer who from time to time when profit growth does slow for the time being, bewail that a corporation has "gone ex-growth" or "run out of ideas". Repeated disparagement of that kind runs the risk of rooting management to pursue sub-optimal growth prospect for the sake of a quieter life, at least in the short term. It is significant to take account of external implications about what your corporation should be doing but even more vital to march to the beat of your own drum. In West Farmers that beat is about long term shareholder returns. We manage the corporation for the "buy and hold" investor, who is anxious about long term TSR (total shareholder return) rather than periodical profit numbers. To date that has proved an unbeaten approach.


At 30 June 2004, the West Farmers group had a total enduring workforce across Australia and New Zealand of about 30,000 employees together with 10,000 casual employees. The occurrence of work-related injuries turn down in 2003/04 across most group actions, reflecting the strong focus of management and the recognition by employees that safety is a supreme accountability. Increasing numbers of our employees have a proportion of their compensation linked to safety performance. It is agreeable to report that over 90 per cent of eligible employees accepted request during the year to apply for shares in West Farmers Limited through the employee share plan. Roughly 16,000 employees of the West Farmers group now hold shares in the company, on behalf of around four per cent of West Farmers' issued capital. This share plan has certainly been a major driver of employee inspiration.

Management Changes

In accumulation to the senior actions and retirements referred to in the Chairman's letter, other important management changes happened during the year. Mr. Bryce Denison, West Farmers' General Manager, Group Accounting retired after more than 18 years of exceptional service to the corporation. I thank him for his important payment and wish him well in his retirement. Following the acquisition of the Lumley insurance businesses, Mr. Bob Buckley, formerly General Manager of West Farmers Federation Insurance, was appointed Chief Executive Officer of the group's insurance division. After the close of the financial year, Mr. John Gillam, formerly Managing Director of CSBP, was chosen Managing Director of Bunnings and Mr. Peter Davis understood the role of Chief Operating Officer of that corporation. Mr. Keith Gordon, who has widespread agribusiness experience within and outside West Farmers, was appointed Managing Director of CSBP.


The outlook for the group is encouraging. Current potential are for another increase in standardize profits in all major distribution in the 2004/05 year. The Bunnings hardware retailing business should produce good profit and profit growth in 2004/05 but the rate of retail sales growth in Australia is predictable to be lower than in before. New warehouse expansion is estimate to continue at between 8 to 12 stores per year, though the greater part of openings in the next year will be in the second half. The first new Series 3000 warehouse stores in both Australia and New Zealand are due to open soon after this year.

The corporation's energy businesses are expecting a year of growth. After confronting tougher market conditions for most of the 2003/04 year the coal businesses are now taking advantage of better thermal and coking coal prices, as a result of strong demand for these products. Production from the Curragh North coal resource is scheduled to begin in the first quarter of the 2005 calendar year. Development of this resource will more than double the recoverable coal reserves currently available. Exports from Curragh and Curragh North are now expected to increase from the 2003/04 volume of 4.6 million tones to five million tonnes in 2004/05 and seven million tonnes in 2005/06.

Profits from the gas businesses will once again be reliant on the level of international LPG prices and domestic competition. Attention will be paid on completing negotiations to acquire reasonable gas supply arrangements for West Farmers LPG beyond 30 June 2005, on completing new projects such as the $45 million Air Liquide plant to service HIsmelt and on acquiring lucrative opportunities for StateWest Power.

The industrial and safety businesses anticipate a modest profit boost in 2004/05. The outlook for the business in Australia is normally positive, with bigger spending expected in the mining and transport infrastructure sectors. New Zealand's economic outlook remains stable and the mixing of the Paykels business is projected to put in to growth in profit and profits. The outlook for the insurance division is also encouraging in spite of signs emanating of bigger competition in some market segments. CSBP's chemicals and fertilizers businesses are anticipating an improvement in profits, conditional on rational seasonal conditions in Western Australia and sustained strong demand for chemicals from the mining sector. Profits from the Australian Railroad Group are likely to carry on improving owing to a positive outlook for grain and other commodity volumes and additional operational improvements. A more comprehensive appraisal of the group's operations appears in the divisional reports which follow.

SWOT Analysis

West Farmers is an Australian corporation engaged in mining, energy distribution, building material retailing, industrial and safety products, insurance, chemicals and fertilizers and rail transport. The corporation holds a dominant position in the industry and safety products. However, the corporation is exposed to intense competition in the highly fragmented hardware market.


Diversified product portfolio

Largest distributor of industrial and safety products

Consistent profit growth


Increased indebtedness

Weak performance of energy division


Business expansion

Positive outlook in energy

Strong demand for chemicals and fertilizers


Cyclic nature of certain segments of construction industry

Intense competition

Compliance with regulations


Philip M. Parker West Farmers Limited: Labor Productivity Benchmarks and International Gap Analysis INSEAD 2006

Market Intelligence Strategy Centre, 2001, Special SME Analysis, prepared for Australian Bankers Association.

West Farmers (2003). 2003 Report

Environment, Health, Safety and the Community.

West Farmers (2004). "Social Responsibility Report 2004."

Waring, P (1999), "The rise of individualism in Australian industrial relations", New Zealand Journal of Industrial Relations, Vol. 23 No.3, pp.291-318.

Australian Stock Exchange, ASX Corporate Governance Council: Principles of Good Governance and Best Practice Recommendations, ASX, March 2003.

Delves, D. (2000), 'Balancing the Costs and Benefits of Options: How to Solve the Stock Option Bind', Compensation and Benefits Review, March-April, 25-34, 51-56.

ANNUAL & HALF YEARLY REPORTS 2005/2006 Half Yearly Report 8 March 2006 retrieved from www.West