Metcash Limited

Healthy Growth Prospects: Metcash Limited (ASX: MTS) is engaged in the business of Food & Grocery, Liquor and Hardware. A leading wholesaler and distributor supplying to approximately 10,000 independent retailers across the segments it caters. Some of the leading independent brans are IGA, Mitre 10, and Cellarbrations.

Recently, eCargo Holdings Limited (ECG) completed transformational acquisition of 85% of Metcash Export Services Pty Limited with Metcash retaining 15%. This acquisition shows management’s intentions to become a leader of consumer products export into China.

MTS has entered into an agreement with Charter Hall for leasing and construction of a new ‘best in class’ Distribution Centre (DC) at Gepps Cross in South Australia. It would result in independent retailers’ witness increase of its operational efficiencies network in South Australia.

The total Food sales came in at $ 4.33 billion in 1HFY19 as compared to $ 4.29 billion in 1HFY18, recording a growth of 1%. Challenging market conditions prevailed in the supermarket segment for which revenues stood at $ 3.6 billion for H1FY19, almost flat as compared to 1H FY18. Downside seen in deflation led the improvement in wholesale revenues. Food EBIT for the same period went up to $ 93 million, up 2.4% with EBITDA margins at 2.1%.

Liquor business saw a revenue of $ 1.8 billion in the first of half, recording a growth of 6.7%. Reported EBIT for 1HFY19 came in at $ 29.1 million, broadly flat as compared to $ 29.4 million in 1HFY18. This was due to higher costs incurred during the same period. Revenue from Hardware business for 1HFY19 stood at $ 1.09 billion, up 1.3%. Sales was adversely impacted by the closure of unprofitable corporate and JV stores. Reported EBIT for the same period went up to $ 37.8 million from $ 28.2 million in 1HFY18.


Sales Revenue (Source: Company Reports)

Outlook:In the food segment, the highly competitive market conditions are expected to continue through the balance of FY19. Management expects that incremental investment in the supermarket business is likely to impact the earnings (EBIT) in the second half of FY19. However, such investments will deliver earnings beyond FY19. The management expects the liquor segment to deliver volume growth over the balance of FY19 to be modest. The hardware segment is expected to be soft, however, the management believes the levels would be above historical averages.

Analysing the key ratio matrices, asset to equity ratio for MTS at 2.76x is largely in-line with the industry median of 2.76x. Liquidity is also comfortable for MTS as the current ratio at 1.17x is well above the industry median of 0.85x.

Considering the relative valuation, EV/EBITDA for MTS at 6.4x is similar to the industry median of 6.4x. Price to book value at 2.0x for the company is below the industry median of 2.3x which might attract investors eye for investment purpose.

On the stock performance front, the stock has given a negative return of 11.44 % in last one year but up by 3.87% on YTD basis. As of now, the stock is trading close to a 52-week lower level of $2.250,thus, providing decent entry levels to the market players. Annual dividend yield for the stock stands at 4.98%. Considering the half-yearly results and an attractive relative valuation, we maintain our “Buy” recommendation on the stock at the current market price of $2.70.
 

The Star Entertainment Group Limited

Record domestic revenue growth and EBITDA Growth: The Star Entertainment Group Limited (ASX: SGR), formerly known as Echo Entertainment Group, is engaged in the business of resorts providing entertainment and hospitality services and gaming in Australia. The company operates through the following segments – Gold Coast, Brisbane, and Sydney.

SGR posted excellent results on account of strong domestic revenue growth continuing from 1H FY2019 into early 2H FY2019 across slots, tables and non-gaming. Statutory Revenue for SGR came in at $ 1,150.1 million for 1H FY2019, posting a growth of 14.9% for the same period the previous year. EBITDA for the same period came in at $ 331 million posted strong growth of 65.9%, supported by rate card reductions.

EBITDA Bridge (Source: Company Reports)

Recently SGR received the intention of Queensland Govt to test the market and call for Registrations of Interest (ROI) to develop a “Global Tourism Hub” (GTH) on the Gold Coast.

On the stock performance front, SGR has generated a negative return of 20.04% (1-year) and 16.73% (6 months) for its shareholders. Currently, the stock is trading close to the 52-week lower level of $4.070, posing an attractive opportunity for accumulation at the current juncture.Annual dividend yield for SGR is 5.56%.At CMP of $ 4.3, the stock is trading at PE multiple of 14.24x, below the industry median of 15.4x. P/B at 1.0x for the stock also remains below the industry median of 1.9x, signifying undervalued at the current juncture.

Considering the strong financial health and results delivered for a half year of FY19, and comfortable relative valuations, we maintain our “Buy” recommendation on the stock at the current market price of $ 4.30 (up 1.655% on April 03, 2019).
 

Propel Funeral Partners Limited

Death volumes were below trend: Propel Funeral Partners Limited (ASX: PFP) deals in the death care industry which stand to benefit from the growing and ageing population. The company owns funeral homes, cemeteries, cremation facilities and related infrastructure in Australia and New Zealand. Propel currently operates from 109 locations, including 25 cremation facilities and 8 cemeteries.

PFP has witnessed strong financials in last few years and the performance continued to FY18 as well with whooping revenue growth of 76% to $ 80.9 million and EBITDA came in at $ 21.5 million, displaying growth of 75% in FY18 over the prior year.
 

Performance Highlights (Source: Company Reports)

Results announced for the first half of FY19 were resilient though death volumes were below trend which management expects is temporary. The total revenue was reported at $47.1 million registering a growth of 20.9 % as compared to pcp. However, the growth in operating EBITDA was not as robust as revenue, with the EBITDA coming in at $11.7 million reporting a decent growth of 6.4% as compared to pcp. For the same period, PFP has declared a fully franked interim dividend of 5.7 cents/share which is 75% of its distributable earnings. It will be payable on April 05, 2019.

Financial Performance (Source: Company Reports)

PFP has recently acquired Morleys Funerals Pty Ltd together with its associated businesses (the Morleys Group). With this development, PFP will have a presence in Townsville. As an interesting adjacency, this facility will provide pet cremation also.

PFP in New Zealand has acquired Waikanae Funeral Home and the Kaitawa Crematorium, located in Waikanae. It also acquired Howard & Gannon Funerals located in the coasted city of Napier. These two places were unreached earlier. With the acquisition, propel would strengthen its presence in New Zealand which is a core market for it. 

The acquisitions that took place in FY18 and H1FY19 are well placed to benefit the company painting a good picture with expected higher funeral volumes.

Meanwhile, the stock has risen 17.76% in the past three months as of 02 April 2019 and is trading above the average of 52 weeks high and low level of ~$2.81. Hence, consideringits decent financials in 1HFY19 along with current trading level, we give a “Hold” recommendation on the stock at the current market price of $2.960 (up 0.339% on April 03, 2019).
 

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