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Market Mixed on Metcash Outlook

Australia | Sep 15 2022

This story features METCASH LIMITED, and other companies. For more info SHARE ANALYSIS: MTS

Despite strong year-on-year sales growth in the new financial year, brokers remain split on how an inflationary environment may impact Metcash’s market share in the coming year.

-Metcash delivers strong start to the new financial year with sales growth of 8.9%
-Independents prove resilient year-to-date despite inflationary environment and lockdown cycling
-Value consciousness could see consumers revert away from independents, but some analysts see potential for Metcash to continue to gain market share

By Danielle Austin

Reporting a strong start to the year at its recent annual general meeting, Metcash ((MTS)) has delivered 8.9% group sales growth in the first seventeen weeks of the new year.

Segmentally, hardware and liquor underpinned the result, up 19.5% and 11.5% year-on-year respectively, while food was up a softer 4.3%. By brand, Total Tools reported an 85% sales increase year-to-date and Independent Hardware Group a 12% increase.

Analysts have noted the continuing strength in Metcash’s results reflects independent supermarket customer retention post-lockdown. Independents industry wide have reported a sales rise of 2.6% in the two weeks to September 8, while Woolworths ((WOW)) reported a -0.5% decline in the same period.

Value consciousness is expected to increase as inflationary impacts take hold, potentially driving consumers away from independents and towards discount retailers. The duopolistic nature of the domestic grocery sector could provide some buffer to Metcash’s food division. Results have also spoken to the company’s cost management, and effective pass-through of inflation-driven costs.

Brokers debate whether Metcash will gain or lose share market

Analysts share differing opinions on the likelihood of Metcash making or losing market share. While sales growth strength and customer retention in the first seventeen weeks of the year are positive indicators that independents may weather the inflationary storm, some brokers remain cautious on risk of value-seeking consumers reverting to discount retailers.

The five FNArena database brokers that cover Metcash all updated on the company following its full year results release in June with three equivalent Buy ratings and two equivalent Hold ratings. Between them these brokers have an average target price of $4.73, with a range of $4.40-5.00.

Ord Minnett (Buy, target price $5.00) found Metcash’s market update supportive of its positive outlook for the company, and retains a clear preference for Metcash over competitors Woolworths and Coles ((COL)). The broker expects Metcash is likely to retain share market gains in the medium-term but assumes Coles and Aldi to currently be regaining market share. The broker sees capital expenditure and investment spend driving growth and has lifted its earnings per share estimates 1-2% through to FY25.

UBS (Buy, target price $5.00) notes Metcash has, to date, retained most of its local tailwind advantage, backed by improved offers from independent retailers. The broker finds Metcash better positioned than Woolworths and Coles given supply chain and labour cost pressures, likely to continue, are not expected to drive earnings margin compression.

Updating in late June, Credit Suisse (Neutral, target price $4.67) expects Metcash’s food segment will lose ground to competitors, anticipating inflation to increase value consciousness in consumers, while Citi (Neutral, target price $4.40) expects market share gains to normalise in the coming year. Macquarie (Outperform, target price $4.60), noting early results suggest consumers remain interested in shopping local post-covid, finds the business materially improved from pre-covid. Macquarie does prefer Coles to Metcash, but Metcash to Woolworths.

Outside of the database brokers, Jarden and Goldman Sachs have also updated. While Goldman Sachs (Neutral, target price $4.50) expects Metcash will struggle to take more market share, Jarden (Overweight, target price $4.50) anticipates share gains and a strong order backlog should drive a solid second half. Estimating Metcash’s hardware operations account for more than 55% of the stock’s total valuation, and that the outlook for household goods in deteriorating, Jarden anticipates Metcash will emerge an inflation beneficiary in the coming year given operating leverage in its food division.

The broker highlighted Metcash’s early results come in contrast to a weaker update from Woolworths, but does cut food earnings by -1% to -2% to reflect moderating sales growth. The broker lifts its earnings per share forecasts 2-3%, predicting Metcash can deliver a 4% three-year earnings per share compound annual growth rate.

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