Metcash Limited

 

MTS Details
 
Cost Cutting Initiatives to Aid MTS in Long-term: Metcash Limited (ASX: MTS) is a wholesaler to independent retailers in the food, grocery, liquor, hardware & automotive industries. The market capitalisation of the company stood at $2.91Bn as on 23 March 2020. In a recent update, the company stated that National Australia Bank Limited and its associated entities have become a substantial holder of the company, with a voting power of 5.208%. In another update, the company announced that Brad Soller has showed his intention to step down from the post of Group Chief Financial Officer in the company. Mr Soller has agreed to continue with his roles and responsibilities in the company till the selection of a successor, which is expected to be done by FY21 end.
 
H1FY20 Financial Highlights for Period ended 31 October 2019: During the period, the company’s total revenue (statutory) increased 1.6% year over year and stood at $6,289.8 million. The rise in revenue was on the back of higher sales growth in the Food and Liquor pillars, offsetting the decline in Hardware sales. Underlying EBIT stood at $149.7 million, representing a decline of 5.3%, primarily due to reduced contribution in the Food pillar from the resolution of onerous lease obligations. Underlying profit after tax came decreased from $100.3 million in 1HFY19 to $95.7 million. The company paid an interim dividend of 6 cents per share during the period. Food, liquor and Hardware contributed 61%, 25% and 14% of sales revenue, respectively. Operating cash inflow for the period stood at $88.8 million, with cash realisation ratio of 52.4%.
 

1HFY20 Financial Highlights (Source: Company Reports)
 
What to Expect: Metcash expects construction activity to be supported by population growth as well as undersupply of housing. Under the Food segment, the company further anticipates cost cutting initiatives to help offset the cost inflation impact over the remainder of FY20. In the liquor segment, the company expects the market in the remainder of FY20 to get affected by the ‘premiumisation’ trend.
 
Valuation Methodology: P/E Multiple Based Relative Valuation

P/E Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months
 
Stock Recommendation: The stock of the company is currently trading at its 52-week high level of $3.29. In 1HFY20, current ratio and quick ratio of the company stood at 1.11x and 0.69x as compared to the industry median of 0.66x and 0.23x, respectively. This reflects that the company is in a decent position to address its short-term obligations against the broader industry. We have valued the stock using the P/E based relative valuation method and arrived at a target price with an upside of single-digit (in percentage terms). For the purpose, we have taken peers such as Graincorp Ltd (ASX: GNC), Coca-Cola Amatil Ltd (ASX: CCL), Treasury Wine Estates Ltd (ASX: TWE), to name few. Considering the decent liquidity position and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $3.29 per share, up 2.812% on 23 March 2020.
 
 
MTS Daily Technical Chart (Source: Thomson Reuters)

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