Result Snapshot: Metcash Ltd (ASX: MTS) recently released its full year results showing that group’s revenue was up 1.3% with supermarket sales up by 0.5% with the estimated impact of the damage to the distribution centre in New South Wales taking into account while supermarket revenue was up 0.9%. The group EBIT at $ 275.4 million was in line with expectations with a drop of 7.4%. The underlying profit after tax of $ 178.3 million was up by 2.7% and the reported profit after tax was $ 216.5 million amounting to an underlying EPS of 19.2 cents per share, compared to 19.1 cents in the previous year.
The debt condition improved significantly with the sale of the automotive business, tight cash management, and recycling of capital. Particularly, the reduction of $ 392.3 million in net debt was quite an improvement from the $ 99.1 million of the previous year. Net cash from operating activities amounted to $ 165.8 million compared to $ 231.7 million.
IGA retailers experienced growth for the last four consecutive reporting periods and liquor sales were up 3.7% while hardware witnessed growth of 0.8%. Liquor and hardware continued to report earnings growth, though, a decline in convenience earnings had a negative impact.
MTS also intends to recommence half yearly dividend payments with effect from the final dividend for FY 2017, subject to capital requirements.
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Debt Maturity Profile at FY16 (Source: Company Reports)
Transformation Plan: The second year of the Transformation Plan was completed and the key diamond Initiatives are continuing to produce results. The Working Smarter Program is well under way and the focus continues to be on group culture and the support of successful independents. The management team has been strengthened.
Update on Huntingwood Distribution Centre: The Huntingwood Distribution Centre has been reoccupied in April 2016. The Huntingwood Distribution Centre’s damage caused by hail on April 25, 2015, was brought under control by the contingency plans to ensure the continuity of supply to retailers. Supply was restored to retailers in New South Wales through Victoria, Queensland and ACT distribution centres.
The Huntingwood facility was reoccupied in April 2016 and is expected to be fully operational in the second half of 2017. The insurance policy is expected to cover material consequential loss and insurance recovery is in progress.
The results suggest that the strategy of reducing prices and store refurbishment are bringing back shoppers to IGA supermarkets. However, the market seems to feel that the chain is still subject to fierce competition from Coles and Aldi and, despite the sales growth and the return to profitability; shares fell by as much as 14% in afternoon trading before recovering slightly to close at $ 1.86 down 12.5%. The company has spent around $ 45 million on cutting costs of Black & Gold products and plans to cut the prices of key items to match the competition. Large investments have also been made in Project Diamond to help the refurbishment by store owners. These have produced better sales, but have reduced profit margins with supermarket earnings falling by 17%.
Though Metcash is halfway through its $750 million turnaround plan that is based on offering competitive prices and it believes to return to profit growth in 2016 but given the competition in hand, grocery price fluctuations and programs like Working Smarter cost reduction program expected to deliver savings around $35 million in 2017, MTS may take some time to recover. Nonetheless, the stock has risen 4.3% on June 21, 2016.
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