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.

---

Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people.
Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).
The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation.
Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product.
The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide.