BUY HOLD SELL – Metcash (ASX: MTS)
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 ObservationsWhy not sign up for a free trial? Get access to expert insights and independent research and become a better investor.
- 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.