Metcash Limited

MTS Details

Growth in Food and Liquor Sales Offset by a Decline in Hardware Sales:Metcash Limited (ASX: MTS) is a leading wholesale distribution and marketing company in Australia. As per an announcement dated 17^th January 2020, the company notified about the retirement and resignation of Mark Laidlaw as the CEO of the Hardware vertical. Mark will be stepping down from his position at the end of April, after serving the organisation for 10 years. As a replacement, Annette Welsh has been appointed as the new CEO, effective from 1 May 2020. Annette holds over 30 years of relevant experience with renowned organisations such as Marks and Spencer, IBM, etc. As per another recent announcement, the company updated that the voting power of Allan Gray Australia Pty Ltd increased from 13.60% to 14.64%, with effect from 2^nd January 2020.

1HFY20 Highlights: During the half year ended 31 October 2019, total sales revenue amounted to $6,289.8 million, up 1.6% on the prior corresponding period revenue of $6,189.2 million. An increase in food and liquor sales during the half, was offset by a decline in hardware sales. Underlying EBIT for the period amounted to $149.7 million, down 5.3% on pcp. The Board declared a fully franked interim dividend of 6.0 cents per share, with a payment date of 23^rd January 2020 and a payout of ~60% of the underlying earnings per share.


1HFY20 Sales Revenue (Source: Company Reports)

Across the food domain, sales from supermarkets improved on the back of successful execution of growth initiatives and reduction in price deflation. The period witnessed continued improvement in retailer and supplier satisfaction scores. Sales across convenience stores increased by 2.8%, majorly due to higher tobacco sales to large customers.

Sales across the liquor segment were supported by continued investment, growth in customer base, and an increase in ‘on-premise’ sales. However, the contribution from increased sales was offset by an increase in costs.
The Hardware business reported a decline of 4.2% in sales, due to the impact of the slowdown in construction on Trade sales. The decline, however, was partly recovered in the form of improved DIY sales, cost efficiencies, and full synergy benefits from Home Timber & Hardware (HTH) group acquisition.

Outlook: The company has reported continued growth in ex-tobacco wholesale sales across Supermarkets, in the first five weeks of 2H20, excluding the impact of Drakes. Going forward, the company aims to lessen the impact of cost inflation through a continued focus on costs. The ‘Premiumisation’ trend that reflects a scenario of higher quality but lower consumption, will continue to influence the liquor market over the remainder of the year. In the hardware space, the company expects to maintain a strong focus on costs to mitigate the impact of the slowdown in construction activity. However, fundamentals remain positive over the medium to long-term, underpinned by improved construction activity due to population growth and undersupply of housing.

Valuation Methodology: Price to Earnings Multiple Approach

Price to Earnings Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of the company gave negative returns of 9.34% over a period of three months. Currently, the stock is trading below the average of its 52-week high and low of $3.210 and $2.330, respectively. As a part of its future initiatives to drive business growth, the company is looking forward to increased control over costs, investment for improving the quality of reports, accelerating opportunities through digital capability, expanding the store network, etc. We have valued the stock using Price to Earnings based relative valuation method and for the purpose, have taken the peer group - Harvey Norman Holdings Ltd (ASX: HVN), Super Retail Group Ltd (ASX: SUL) and Coca-Cola Amatil Ltd (ASX: CCL). We have arrived at a target price offering an upside of lower double-digit (in percentage terms). Considering the decent outlook, future growth initiatives, and current trading levels, we give a “Buy” rating on the stock at the current market price of $2.600, down 0.763% on 17 January 2020.


Daily Price Chart (Source: Thomson Reuters)

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.