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Kalkine Daily 21/08/2014 + Metcash

Aug 21, 2014

Stock of the Day – Metcash (MTS)

Metcash reported fiscal 2014 underlying profit after tax of AUD 250.1million down 10.9% on the previous period. The result is in line with our earnings expectations. The decline is attributable to the food and grocery business which remains in a process of reorganization. Underlying industry price deflation has produced negative operating leverage as revenue falls at faster rate than operating costs.


MTS Dividends (Source – Company Reports)
 
The aim for fiscal 2015 is to reverse this trend and drive earnings growth. To achieve this  Metcash will spend AUD 40 to AUD 45 million to revitalize the competitive position of the food and grocery business. A key component of this investment is driving down prices across key brands to match the discount offered by majors. For this strategy to work lower prices would need to be offset by higher sales volumes.


MTS Gearing (Source – Company Reports)

We expect price deflation within the supermarket space to remain and in such an environment the lower cost supplier of products will ultimately win market share. This explains why we view Metcash as overvalued and will continue tow suffer as the majors increasingly take share away from the independent retail sector. Scale  has proven to be an important attribute enabling the largest retailers to derive cost advantages by negotiating favorable terms with suppliers and passing them on to the customer.


MTS Daily Chart (Source – Thomson Reuters)
We expect both Woolworths and Coles will continue to take share from the independent channel as they increasingly invest in lower prices to further differentiate their value proposition from smaller retail groups. The company will co invest, educate and incentivize independent retail owners to rejuvenate the food and grocery store portfolio. A key focus will be to use product purchasing data collected by the group to improve the performance of individual store owners to optimize ranging and increase sales of higher margin fresh produce. We believe the stock is expensive at its current price and would review the stock at a later date.



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