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Metcash Limited

Team Veye | 11 Feb 2021 ASX - MTS
Metcash Limited
Call Buy
Asx MTS

Metcash Limited (ASX: MTS) is an Australia-based wholesaler and distributor, engaged in supplying and supporting independent retailers and other businesses across the food, grocery, liquor and hardware industries. The Company's segments include food, liquor and hardware. Food activities comprise the distribution of a range of products and services to independent supermarkets and convenience retail outlets. Liquor activities comprise the distribution of liquor products to independent retail outlets and hotels. Hardware activities comprise the distribution of hardware products to independent retail outlets and the operations of Company owned retail stores. Its Independent Brands Australia (IBA) business operates national independent retail brands including Cellarbrations, The Bottle-O, IGA Liquor, Duncans, Thirsty Camel, Big Bargain and Porters. The Company has operations in Australia and New Zealand. (Profile source: Reuters)

From the Company Reports

Metcash Limited (ASX: MTS) on 7 December 2020 released its financial results for the half year ended 31 October 2020.

Highlights:

Reported significant growth in sales volumes across all Pillars.

An increment of 12.2 %to $8bnin 1H21 from 47.2bn in 1H20 in Group Sales revenue (including charge-through sales) was contributed by:

  • Total Food sales (including charge-through) increased by 9.5% to $4.8bn and by 16.3% excluding Drake's and 7-Eleven impact.

(Graphic Source – Company Reports)

  • Supermarkets sales increased by 14.6% to $4.1bn in 1H21 compared to $3.59bn in 1H20 Sales increased by 18.3% excluding Drakes.
  • The increase in Supermarket sales was driven by a change in consumer behaviour with more home cooking and Preference for local neighborhood shopping resulting in an increase in both foot traffic and average basket size,
  • Supermarket sales ex-tobacco increased by 13.0% and by 16.7% excluding Drakes.
  • With increased demand in rural and remote areas, Convenience sales were down by 14.3% to $672.7m in 1H21 as compared to $784.6m in 1H20
  • MFuture investment initiatives assisted in the retention of new and returning IGA customers.
  • Total Liquor sales (including charge-through) increased by 14.3% to $2.0bn from $1.78bn underpinned by strong demand across the retail stores offsetting the adverse impact of trading restrictions on ‘on-premises’ customers.
  • Total Hardware sales (including charge-through) increased by 20.6% to $1.3bn, with significant growth in DIY sales.
  • Strong performance from Sapphire stores together with MFuture initiatives and changes preferences of consumer led to growth in DIY sales.
  • Loyalty membership was up 13% to 1.15m
  • Significant growth of 104% in online sales with 26% growth in transactions and 13% rise in average basket size together contributed to increase in Hardware sales.

(Chart source: TradingView)

Strong earnings growth with underlying Group EBIT up 30.4% to $203.0m

  • Food EBIT increased by $14.6m or 16.5% to $103.0 m. The growth EBIT was driven by strong growth in sales volumes and higher contribution from joint venture stores.
  • Food EBIT margins improved by 10bps to 2.1% reflecting the positive operating leverage from higher sales volumes.
  • Liquor EBIT increased by $9.4m or 30.6% to $40.1m, driven by the strong sales growth. EBIT margin increased by 2.0% to 30 bps reflecting the positive operating leverage from higher sales volumes.
  • Hardware EBIT increased by $25.6m or 65.8% to $64.5 m. The growth was attributed significant increase in sales volumes along with an increased contribution from joint ventures and company-owned stores and well managed costs.
  • Hardware EBIT margins improved by140bps or5.1% reflecting the reflecting higher proportion of DIY in the sales mix.

Financial Highlights

  • Underlying profit after tax increased by 43.0% to $129.6m
  • Statutory profit after tax of $125.1m as compared to a loss of $151.6m in 1H20
  • Group revenue increased 12.2% to $7.1bn and 12.3% to $8.1bn including charge-through sales
  • Strong earnings growth with underlying Group EBIT up 30.4% to $203.0m
  • Increase in interim dividend to 8.0 cents per share as compared to 6.0 cents in 1H20

(Chart source: Barchart)

MTS Value Proposition

  • MTS has become profitable over the past 5 years, growing earnings by 3.7% per year.
  • MTS's dividend yield at 4.19% is higher than the bottom 25% of dividend payers in the Australian market at 2.03%.
  • Dividend payout ratio of 60% of underlying profit after tax for 1H21, well in line with current policy.

 

Metcash Limited (ASX: MTS) 
Stock Overview
Sector Trading
Risk Low to Medium
Market Cap $3.629B
Shares Outstanding 1022.36M
EPS (FY) $0.23
PE RATIO 15.72
Yearly Dividend Yield  4.19%.
Target Price (s) T1 $4.86    T2 $5.39
Stop Loss $3.06
Recommendation BUY
52 weeks High $3.62
52 weeks Low $2.17
Managing Director Mr. Jeffery K. Adams
Non-Exec. Director Ms. Christine Francis Holman

 

Key Financial Metrics:

Peer Analysis

Company

ASX CODE

Market cap

Net income (TTM)

P/E (TTM)

P/BV      (MRQ)

Return On Investment (TTM))

Payout ratio (TTM)

Metcash Limited

ASX: MTS

3.62bn

219.90m

15.72

2.68

10.53

67.26

GrainCorp Limited

ASX: GNC

1.01B

35.2m

28.99

0.92

1.67

0.00

Coles Group Limited.

ASX: COL

24.46B

978m

25.02

9.36

10.77

78.32

Woolworths Group Limited

ASX: WOW

52.70B

1165

45.2

6.02

6.10

101.8

 

  • Debt Level: MTS is debt-free.
  • Reducing Debt: MTS has no debt compared to 5 years ago when its debt to equity ratio was 37.4
  • PB vs Industry:  MTS PB Ratio 2.68x is in line with the XO Consumer Retailing industry average.
  • PE vs Industry: MTS is good value based on its PE Ratio at15.72x compared to the XO Consumer Retailing industry average at 24.9x
  • PE vs Market: MTS is a good value based on its PE Ratio at 15.2x compared to the Australian market at 23.8x.
  • Short Term Liabilities: MTS's short term assets at A$3.0B exceed its short term liabilities A$2.7B and long term liabilities at A$805.6M
  • Return vs Industry:  MTS exceeded the Australian Consumer Retailing industry which returned -0.4% over the past year.
  • Return vs Market: MTS exceeded the Australian Market which returned 1.1% over the past year.

 

Market Risk Analysis

  • Rising interest rates. Higher interest rates usually mean that borrowers end up paying more for their purchases. If interest rates go up, consumer spending may drop, affecting sector performance.
  • Changing consumer preferences. Customers have shifted their buying habits to include e-commerce and specialty brands, such as organic, fresh options. Companies need to continually keep in touch with consumers.
  • Competition from direct-to-consumer delivery - Consumers' comfort with buying anything online has meant that a company with some clever marketing and lots of venture capital backing can quickly gain significant market share by selling staples directly to the consumer.

 

Technical Analysis

The stock after making a high at $3.47 remained completely bearish till the levels of $2.25. The stock managed to take the support at the lower band of the Bollinger. The overall trend has remained bullish after that (as indicated by the “Trend Line” on the charts. The formation of the “Bullish engulfing” at the middle band of the Bollinger continued the upside trend. Formation of the “Bearish engulfing” at the upper band of the Bollinger (indicated on charts) gave some dips to the upside trend. The stock currently is experiencing “Higher High” formation. The overall upside trend strength is well supported by the RSI and MACD in positive territory. On a larger time frame chart, drawing a Fibonacci from a swing high to swing low, as marked on the charts, the stock has retraced from its low and currently trading above 50% fibo levels. The two horizontal lines on the chart indicate the next immediate resistance levels.

(Chart source: TradingView)

(Chart source: TradingView)

Veye’s Take

MTS has posted a strong start to 2H21 with sales momentum continuing in all Pillars in the first five weeks of 2H21. Strong demand across the retail network resulted in a 16.9% increase in Liquor sales in the first five weeks of 2H21, a 2.4% increase in food sales.25.3% increase in Hardware sales driven by strong demand in DIY and trade sales progressing positively on track. The competitiveness of the retail network is expected to further improve with the MFuture initiatives, which will further assist in the retention of new and returning customers gained through the COVID-19 period. The company is strongly focused on costs to help offset the impact of inflation and other cost pressures. Veye recommends a “Buy” on “Metcash Limited” at the current price  of $3.56


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