Metcash Result Draws Mixed Reviews

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This story features METCASH LIMITED, and other companies.
For more info SHARE ANALYSIS: MTS
The company is included in ASX200, ASX300 and ALL-ORDS

By Chris Shaw

As the third major player in the Australian grocery market Metcash ((MTS)) is always going to suffer during periods of price competition between market giants Woolworths ((WOW)) and Coles ((WES)), but according to Merrill Lynch the group’s profit result showed those fears had been somewhat overdone in the market.

In the broker’s view the result also helps to put to rest some fears of the potential impact of the drought on the group’s fresh food operations, so the analysts viewed the result in a positive light and continue to rate the stock as a Buy on valuation grounds.

On the broker’s unchanged earnings forecasts, which call for earnings per share (EPS) of 26.1c in FY08 and 29.4c in FY09, the shares are trading on a FY08 P/E (price to earnings ratio) of 16.7x, while its valuation on the stock is steady at $5.30. This suggests value to the broker, particularly as it expects earnings growth of more than 10% in coming years.

Credit Suisse has a similarly positive Outperform rating on the stock but doesn’t share such a positive view of the profit result, suggesting while it broadly met forecasts it was of low quality.

With Campbell’s suffering from price competition as evidenced by lower margins the broker suggests full year earnings are under some pressure, even though management has reiterated guidance and there is a seasonal factor that means second-half earnings are traditionally higher.

As a result the broker has trimmed its earnings forecast for FY08 by a little over 1% while lifting its FY09 estimate by about 2%, putting its EPS estimates at 26c this year and 30c in FY09. The broker points out its forecasts factor in some $200 million in acquisitions in the Fresh division, so there appears little scope for any upside surprise in its view.

UBS is more positive on the potential for acquisitions to deliver some upside, though the broker notes it depends on price as if deals can be done at around 5x EBIT (earnings before interest and tax) it could prove a catalyst for the shares. Certainly acquisitions are expected, as management forecasts call for the Fresh Wholesale division to lift sales to $200 million for the full year and $300 million in FY09, compared to just $55 million in the first half.

Citi is another to retain its positive view on the stock, suggesting it remains a Buy given the scope for upside from ongoing store refurbishments and new store openings. Countering this view are ABN Amro and Macquarie, both brokers rating the company as a Hold given the potential for margins and therefore earnings to come under pressure from increased competition, particularly given a revitalised Coles.

Following the profit result both brokers have cut their price targets, ABN Amro to $4.09 from $4.48 and Macquarie to $4.67 from $5.05. The average price target in the FNArena database now stands at 4.85, down from $5.04 prior to the result. Thomson One Analytics shows a median price target of $5.00.

The database shows the stock is rated as Buy and Hold four times each, with one Underperform or Sell rating. Shares in Metcash today are slightly higher despite a weaker overall market and as at 1.10pm were up 5c at $4.41.

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