Metcash Limited

New Five-year agreement with Drakes Supermarkets: Metcash Limited (ASX: MTS) is Australia’s leading wholesaler and distributor, supplying and supporting more than 10K independent retailers across the Food, Liquor, and Hardware sectors. The Company recently announced that Vinva Investment Management became a substantial holder of the company with voting power of 5.01%, effective from May 30, 2019. In another update, MTS announced that it has entered into an agreement with Drakes Supermarkets to supply its stores in Queensland for a further 5 years following the expiry of its existing supply agreement on June 2, 2019. The Company has also entered into a new supply agreement with Drakes Supermarkets to supply its Foodland supermarkets in South Australia to September 30, 2019, which may, at the option of Drakes Supermarkets, be extended up to September 30, 2020.

H1FY19 Financial Performance: Group’s revenue increased by 2.2% pcp to $6.2 Bn. Its underlying profit after tax increased by 1.2% pcp to $100.3 Mn.


Source and Application of Funds, FY20-FY24 (Source: Company Reports)

What To Expect: As per the company reports, a highly competitive market conditions in the food segment is expected to continue through the balance of FY19.However, the Company is encouraged by the slowdown in the rate of decline in non-tobacco sales. Metcash expects H2FY19 EBIT to be impacted by ~$8 Mn of incremental investment by the Supermarkets business in growth opportunities.This investment is expected to deliver earnings benefits beyond FY19. The liquor volume growth over the balance of FY19 to be continued at modest levels due to the on-going trend of lower consumption.

In Hardware, MTS expects some further softening in new construction and DIY activity over the balance of FY19, but to levels that are still above historical averages.Full synergy benefits from the acquisition of Home, Timber & Hardware (HTH) is expected to be realised by the end of FY19.

Stock Recommendation: Metcash’s ROE for H1FY19 stands at 7.6%, which is better than the industry median of 5.6%, which implies the company has generated better value to its equity-holders than its peer group. Its current ratio for H1FY19 stands at 1.13x, which is better than the industry median of 0.83x, displaying a decent liquidity position to address its short-term obligations. On the valuation front, its EV/Sales and EV/EBITDA for TTM stand at 0.2x and 7.0x, which are lesser than the Food &Drug Retailing industry median of 0.5x and 7.2x, respectively indicating the undervalued position at the current juncture. Hence, considering the aforesaid facts and current trading level, we recommend a “Hold” rating on the stock at the current market price of $3.060 per share (up 3.378% on June 4, 2019).
 

Bellamy’s Australia Limited

BAL’s Share Plunged Over 5% Post Chinese Government’s New Rules: Bellamy’s Australia Limited (ASX: BAL) is a Tasmanian food brand business which offers a range of organic food and formula products for babies and toddlers. All its products are Australian made and certified organic. The share price of the company tumbled 5.308% on 4 June 2019, owing to the media release of China’s new baby formulas rules. As per the media reports, Chinese government has drawn up new rules for the regulation of the baby formula sector in the land of 1.3 Bn people. The rules are expected in favour of Chinese domestic companies over popular overseas brands such as Bellamy’s Australia Limited (ASX: BAL) and Wattle Health Australia Ltd (ASX: WHA). Earlier the company highlighted that transformational rebrand can help BAL to set a new platform for sustained revenue growth and a higher level of investment in China, which includes doubling marketing spend and doubling the size of the China team in H2FY19.

H1FY19 Financial Performance: A normalised H1FY19 Group’s revenue result of $130 Mn and EBITDA result of $26 Mn largely reflects the net impact of lower revenue and an improved gross margin.The revenue got impacted by a number of factors such as delayed SAMR registration, a planned reduction in trade inventory prior to the rebrand, and observed a slowdown in category performance. Its strong balance sheet depicts cash at $95 Mn, zero debt levels, and continued access to a $40 Mn working capital debt facility.


 H1FY19 P&L Statement (Source: Company Reports) 

What To Expect: Group’s revenue for FY19 is expected to be in the range of $275-300 Mn. Its normalised Group EBITDA has been expected to be in the range of 18-22% of revenue, reflecting lower forecast revenue and increased investment in marketing and the China team over the coming period, which is now under scrutiny.

Stock Recommendation: BAL’s stockis trading closer to its 52 weeks low levels which seems to be a strong support level, therefore, there is a probability to retrace from such levels. Its current ratio for H1FY19 stands at 4.84x, which is better than the industry median of 1.42x, implying a better liquidity position to address its short-term obligation than its peer group. Hence, considering the aforesaid facts and current trading level, we recommend a “Hold” rating on the stock at the current market price of $7.850 per share (down 5.308% on June 4, 2019).
 

Wattle Health Australia Limited

Decent Balance Sheet With Substantial Cash & Cash Equivalent And Zero Debt: Wattle Health Australia Limited (ASX: WHA) recently provided a progress update on Corio Bay Dairy Group (CBDG) and the construction of Australia’s first dedicated organic nutritional spray dryer. CBDG is a joint venture between Wattle Health Australia, Niche Dairy and The Organic Dairy Famers of Australia. In the coming weeks, installation of the concrete panels of the dryer and the evaporator building will begin, which will be ahead of the first of five shipments of the dryer/evaporator equipment arriving from overseas in late July 2019.

In its quarterly report (ended on March 31, 2019), WHA highlighted that it finalised the supply agreement with International Supplies and Distribution Co. (ISDC) for the supply of dried dairy baby formula into the Chinese market. During the period, it also entered into a conditional agreement with Mason to acquire a majority holding in leading CNCA accredited manufacturing facility, Blend and Pack. Its cash and cash equivalent for the period was reported at $36,979,412.

H1FY19 Financial Performance: Revenue reduced to $363,000, majorly due to the transition to Australian organic nutritional dairy products.Losses for the period reduced by 66.8% pcp to $4.3 Mn.


H1FY19 P&L Statement (Source: Company Reports)

What To Expect: The company is expanding its product portfolio and distribution channels in both the domestic and international markets, supported by the successful importation of WHA’s natural baby food range into the Indian market and the successful registration and importation of the same product into the lucrative Chinese market. The Company has signed 8 supply agreements for the supply of its natural baby food for the Chinese market, with specific packaging being developed to facilitate these orders.

Stock Recommendation: Wattle Health’s share has made a new 52 weeks low levels, due to which it has entered an over-sold region of Relative Strength Index (14 days), considering the daily framework chart.Its current ratio for H1FY19 stands at 12.94x, which is better than the industry median of 1.42x, which implies the company is in a better position to address its short-term obligations than its peer group. Based on the foregoing and the challenging scenario developing in China, we recommend a “Hold” rating on the stock at the current market price of $0.550 per share (down 8.333% on June 4, 2019).

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