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Kalkine Daily 29/04/2015 + METCASH

Apr 29, 2015

In today’s daily we have covered stock research on METCASH (HOLD).









 

The S&P 500 was up by 5.84 points or 0.28% on Tuesday and closed at 2114.76 points.  TheDow and S&P 500 ended a volatile session higher on Tuesday, helped by strong earnings fromMerck and gains in IBM after it boosted its dividend, while the NASDAQ fell with Apple. Adding to volatility just before the close, shares of Twitter dropped as much as 24 percent after its results were published early. IBM shares rose 1.9 percent to $173.92, giving the Dow its biggest boost. The company hiked its quarterly dividend by 18 percent, the biggest increase in five years. 

Apple swung between gains and losses a day after reporting results. The stock hit a record high in early trading but shares ended down 1.6 percent at $130.56, weighing on the Nasdaq.Merck jumped 5 percent, its biggest percentage increase since January 2014, after reporting better-than-expected results and releasing favorable data late Monday about the safety of its Januvia diabetes drug. Whirlpool fell 7.1 percent to $183.70, the biggest percentage decliner in the S&P 500, after the company cut its 2015 profit and sales forecast, blaming the strong dollar and Brazil's stagnating economy.




MERCK Daily Chart (Source - Thomson Reuters)
 

S&P ASX 200 was down by 34.20 points or 0.57% on Tuesday and closed at 5948.50 points. The banks all fell, with ANZ Banking Group down 0.5 per cent to $35.41, Commonwealth Bank of Australia dropping 0.1 per cent to $92.58, National Australia Bank losing 0.2 per cent to $38.38 and Westpac Banking Corp shedding 1.2 per cent to $38.39. Despite the lift in iron ore prices. BHP Billiton lost 0.4 per cent to $32.42 while Rio Tinto shed 1.6 per cent to $58.79.Fortescue Metals Group retreated 4.7 per cent to $2.45, taking a break from its recent breathtaking rally that saw it lift nearly 40 per cent in just four sessions, while Arrium fell 5.5 per cent to 17¢.

Gold miners Newcrest rose 3.5 per cent to $14.84, while Regis Resources rallied 4.1 per cent to $1.27, not only due to the gold price but also an acceptable March-quarter production report.Woolworths shot up 1.9 per cent to $29.80 but competitor Wesfarmers lost 0.05 per cent to finish at $43.15. Vitamin and supplements maker Blackmores rose 0.3 per cent to $59.65 after forecasting a record full-year profit, with strong sales in Asia. Internet service provider iiNet lifted 2.2 per cent to $9.17 as the board considered bids from suitors M2 Groupand TPG Telecom. M2 Group shed 1.5 per cent to $10.74 and TPG Telecom rose 1.8 per cent to $9.17.




BLACKMORES Daily Chart (Source - Thomson Reuters)




 

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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.
 


Level 13  167 Macquarie Street
Sydney NSW 2000 Australia
E-Mail - [email protected]
Phone - 02 8667 3147


        
Note - You can also view this daily in the special reports section.

 


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