Metcash Limited

Significant impact from loss of a Major Customer in South Australia: Metcash Limited’s (ASX: MTS) stock plunged about 10.95 per cent in the last five days after the announcement of losing its major customer i.e., Drakes Supermarkets in South Australia. This would be a noteworthy hit to Metcash as the total sales including tobacco to Drakes Supermarkets in South Australia were flagged to be significant and the hit is said to be of the order of approximately $270 million in FY 2018. Besides this, MTS has an agreement with Drakes Supermarkets in South Australia to supply its stores through to June 2019. Further, the group has not been advised of any intention to change the current supply arrangement with Drakes Supermarkets in Queensland.

Apart from the aforesaid setback, the company also announced that it is planning for potential new purpose-built Distribution Centre (DC) in South Australia. If the distribution centre is approved then it will enable local independent retailers in South Australia to benefit from significant operational efficiencies, as well as accessing a broader range of products. It would also benefit local suppliers through the opening of a pathway to access Metcash’s extensive distribution network. The assessment work for the proposed new DC has included site identification, which would be well advanced, and preparation for regulatory approvals.

Based on above developments, the group clarified the guidance for its Supermarkets & Convenience pillar wherein Supermarkets & Convenience is expected to report a 1.2% decline in Total Sales and a 3.6% decline in Wholesale Sales excluding tobacco for FY18, both calculated based on 52 trading weeks. However, FY18 earnings for Supermarkets & Convenience are expected to be in line with the prior financial year.


5-Years Historical Performance (Source: Company Reports)

On the other hand, Wattle Health Australia Limited secured an agreement with Metcash The objective of this agreement is to achieve a distribution of its baby food range with Metcash which will support to increase brand awareness and drive sales not only of its baby food range but also its existing range of infant formula. Metcash has more than 10,000 independent retailers and over 90,000 wholesale customers across the food, grocery, liquor, and hardware industries. Recently, the group informed to the ASX that UBS Group AG and its related bodies corporate, a substantial holder of the MTS changed its respective holding on 9 May 2018 from 5.02 per cent of the voting power to 6.17 per cent of the voting power. The share price fell about 16.4% in the last one month as on May 29, 2018; and despite this, the stock looks “Expensive” given the recent shortcomings. The stock further plunged by about 3.3% on May 30, 2018 looking at the future earnings profile.

 
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