Metcash (MTS) is the parent of IGA, Cellarbrations and Mitre 10 which recently jumped more than 7% on its first-half results and is up a relatively modest 30% over the year. MTS promotes itself as the largest supplier to independent supermarkets in Australia, the second-largest player in the liquor market and the second-largest player in the hardware market. Most would argue it plays second fiddle to WES and WOW which are the dominant participants in the hardware and supermarket categories respectively. MTS operates 1612 supermarkets, 2790 liquor outlets and 730 hardware stores. Food is its biggest revenue contributor at 58%, liquor next at 31% then hardware at 11%. MTS to be fair is not the most exciting stock. A boring consumer staple as Marcus would say, but a strong first-half performance has reignited interest. Underlying profit of $146.6m was up 13.1% vs year-ago. Revenue of $8.2bn was up 1.5% vs year-ago and the interim dividend of 10.5c, fully franked was up 31% on FY20. Sales and earnings growth driven by shifting consumer behaviour and improved competitiveness in its retail networks. The success of its MFuture program also added to support. Essentially the development of its eCommerce platforms aimed at making it easier for suppliers and independent retailers to do business. CEO Jeff Adams described the half-year result as ‘very pleasing’ given challenges with supply chains, labour shortages and staff isolations. Those pressures likely to ease further as borders reopen. Talk of peak supply pressures another encouraging sign. In Asia, COVID-related factory closures, energy shortages and port-capacity limits have eased in recent weeks. Ocean freight rates have also retreated from record levels. Management in the release pointed to increased COVID-related labour costs, particularly in distribution centres as the major risk in the second half. The year-to-date trading update pointed to continuing success with momentum expected to continue through the second half. All segments achieved sales growth in the first five weeks of the second half 2022, food up 2.3%, liquor up 7.6% and hardware up 20.1% on the same period a year ago. Good to see momentum elevated especially given slower than expected sales growth from its peer Woolworths (WOW). Main Observations

• ROE of 21.5% is strong, anything above 20 should be considered attractive. Its rival in COL sits on a superior 33.8%.
• EPS and revenue growth are both positive and expected to improve this year until FY25. The further out the estimates the less accurate they typically are so it's best to keep the focus on the next couple of periods.
• A PE of 16.3x is OK. COL sits on 23.7x for comparison so it’s at the cheaper end of the spectrum. It is also ‘cheaper’ than WES and WOW. You are paying less for a dollar of earnings. There was even chatter about MTS being able to support a higher PE ratio following its well-received half-year results. That just means the ‘P’ or price should be higher.
• A gross yield of 6.3% is well above the market average and ahead of peers in COL, WOW and WES.
• It is trading at a 2.2% premium to the average broker target price surveyed by Thomson Reuters.
• Trades ex-dividend on December 20.

Macro tailwinds The ‘tree change’ fuelled by the pandemic and work from home culture has combined into a perfect storm for Metcash, which operates more than 1300 IGA’s that sit in rural locations across Australia. The latest domestic migration stats from the ABS revealed the largest net loss of people from Australia's greater capital cities since the ABS started collecting the data in 2001. NSW regional vacancies are also at unprecedented lows even as we move past lockdowns. A lot of people are moving back into their investment properties because they now no longer need to work in the office and have rented out their properties in the city instead. And that is all music to the ears of MTS. The preference for local neighbourhood shopping and shift from cities to regional areas helped its independent retail networks all deliver ‘like for like’ growth in the half and momentum is still strong. Australians are also spending a record billion dollars a month on renovations in a boom partly fuelled by COVID government stimulus (which is now gone) as people spend more time at home and less money on overseas travel, they are choosing or have already chosen to upgrade their living environment. Good for the hardware segment. Hardware recently became MTS's largest earnings contributor for the first time. Margin upside risk envisaged as the price of timber starts to creep higher. While inflation pressures are expected to ease, we could see high prices linger in which case Mitre 10 may be able to keep margins elevated. Brokers Macquarie, like everyone, was pleased with the performance from the hardware segment. As hardware grows as a percentage of total market share most brokers see it putting upward pressure on the PE multiple. Macquarie upgraded its recommendation to OUTPERFORM from neutral. Target price lifted 14% to 470c, upside of 4.7% implied. Observed IGA posted sales growth well ahead of pre-pandemic levels. Results came in 4% above JP Morgan’s forecast. JP Morgan pleased by IGA’s ability to gain ‘significant’ market share. Citi less bullish than the other two, sees an eventual normalisation of trading. Citi still lifted its target price 4.8% to 440c. Sees MTS fairly valued. Credit Suisse says OUTPERFORM, says Metcash is an ‘increasingly attractive option’. Technical View The share price is up ~30% over the year to date. Not exactly shooting the lights out but MTS shouldn’t be considered a growth company. Half of that improvement has come in the last few days following the results and broker commentary. The share price is tracking in a sideways/positive pattern. RSI is in overbought territory at 71. The MACD forest is indicating momentum is still elevated. The ‘forest’ well above the signal line which is typically considered a bullish signal. Shorting Short interest of more than 6% is something to take notice of. The trend is heading in the right direction albeit modestly, down from almost 9% in December last year. Top Investors A lot more selling than buying going on which isn’t the most encouraging sign. Fund manager Pendal group interestingly sold down its MTS holding despite it being one of the biggest contributors to performance in October. Taking profits perhaps. MTS is Pendal’s sixth-biggest holding in its ‘specialised retirement income portfolio’ with a 4.63% weighting. A disappointing WOW update which flagged less sales growth and higher costs may have motivated a rotation into Metcash. Institutions hold more than 55% of shares on offer which could be considered a big vote of confidence. Management A little disappointing on the insider front, management only makes up less than 1% of its share registry. Conclusion The ability for MTS to hold onto its market share through the pandemic has to be commended. Half-year numbers were ahead of consensus and the bedding down of Total Tools was key in that success. Tailwinds in the tree change and work from home revolution are continuing to support sales although there are questions about the normalisation of those trends. Brokers are bullish but the average price targets imply little upside ~4.5%. Fundamentals are strong and on a PE basis, MTS looks ‘cheaper’ than its peers in WOW, WES, and COL. MTS is a defensive income stock, it is not likely to make you rich, but it will continue to chug along and pay you attractive dividends in this low yield environment. If you are looking for Income and a safe place. Metcash is a good option. We hold it in the DAF Portfolio.