Top Stocks ASX 200 :-


 

Get up to 2 Years of free subscription by inviting your friends to KALKINE!

For every friend of yours who joins KALKINE, we'll give you 3 months of free subscription (up to a limit of 24 months free subscription). If you recommend 3 friends and they join within a month of you referring them, you get 1 year free subscription to KALKINE reports added to your account (up to a limit of 24 months free subscription). Simply reply to this email with their name, e-mail and phone number.
 

METCASH VIDEO



 

Stock Of The Day - METCASH (HOLD)

Metcash Limited (MTS), which has been known to dominate the Australian wholesale distribution of packaged groceries to the independent retailer, is facing hard times given the concerns around MTS’ Food and Grocery business. The predominant factor playing a role is the aggressive pricing from competitors. Competitors like Coles and Woolworths are adopting discounting strategies to be extended from larger metropolitan supermarkets to smaller convenience stores. Owing to the poor contribution from the food and grocery, impact from other divisions has become more prominent. For instance, we see potential in liquor segment despite the submissive market; and hardware & Auto segment is also witnessing a surge in sector growth. Earlier, the margin decline looked cyclical but given the competition low margins may stay for a while. At the same time, businesses such as Mitre 10 hardware chain, which are not a part of the food and grocery segment tend to balance the situation to some extent. This was indicated as part of the results for the half-year 2015 showing an increase of 1% in sales revenues to $ 6.6 billion, a 2.8% increase in reported profit after tax to $ 101.7 million, 9% decline in underlying profit after tax to $ 101.7 million and 10.2% drop in the underlying EPS to 11.4 cents per share, highlighting the reduction in the leverage of operations and the higher level of investment because of the start of the Food and Grocery transformation strategy.



Dividend and Payout Ratio (Source – Company Reports)
 
While Metcash was already witnessing a turmoil given the above and the CEO change as announced by the Company a little while earlier, the latest announcement with regards to damage to the distribution centre at Huntingwood in Sydney brought another level of instability to performance. A few days back only, MTS informed its customers that there may be delays in delivery of liquor and grocery as the distribution centre in Sydney was damaged by a torrential hailstorm. Although the cost of damage has not yet been estimated by the Company, we consider that there could be a negative impact on earnings as a result of higher costs as well as lost sales. MTS is working on a full assessment but on the face of it, the damage has been severe enough to have a negative effect on the ability to service liquor and grocery orders. The Company states that the damage is expected to be covered under insurance. Business continuity plans have also been put into effect and these include the use of alternative existing distribution centres. Fortunately, there was minimal damage to the Perishable and Fresh Warehouse facilities and operations thereof will continue as usual. On top of the existing problems in the Australian retail sector, we believe that the impact of the hailstorm damage needs to be clearly understood and it would be better to adopt a wait and watch approach given a mix of market sentiments. Primarily, there will be costs associated with repair and alternative sites being used for distribution, thus signalling an impact on the financial year performance.



 Metcash Food and Grocery (Source – Company Reports)
 
Before the above misfortune, the Company reported for a strong balance sheet with a modest 1.4% reduction in net debt to $ 756.1 million reflecting the robust cash flow generation from operations, the reduced capital expenditures during the half-year of FY15 and the reduction in the cash dividend. There was an indication of improved gearing as the result of robust operating cash flows, better working capital management and the reduction of capital investment being below the 40% target ceiling. However, the impact of recent happenings is yet to be ascertained.


Competitive Pricing (Source – Company Reports)
 
The Company is still putting efforts to restore sales and earnings growth by refurbishing IGA supermarkets while bringing competitive pricing in comparison to Woolworths, Coles and Aldi. It will not be correct to underestimate MTS’ strategies to match the price in order to deliver better volume growth at this time of distress. Of course, we noted that the Company was otherwise progressing well since March 2015 despite the challenging trading environment with consumers placing additional emphasis on value.


MTS Daily Chart (Source - Thomson Reuters)
 
Based on the above, we put a HOLD recommendation for this stock at the current price of $1.365.