Metcash: Investing For Growth

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

It’s been a slow start to 2024 for Metcash, but the company is investing across its spectrum to drive future growth, which most brokers applaud.

-Weak start in 2024 for Metcash compared to competitors
-Recent acquisitions to provide upside
-Investment in store rollouts and digital improvements
-Investments come with risks

By Greg Peel

Metcash ((MTS)) operates as a wholesale distribution and marketing company in the fields of food & liquor and hardware.

The food segment distributes a range of products and services to independent supermarket and convenience retail outlets. The liquor segment engages in the distribution of liquor products to independent retail outlets and hotels. The hardware segment distributes hardware products to independent retail outlets while also operating company-owned retail stores.

Metcash has long been seen as a third player in food & liquor, compared to the major supermarkets, and second in hardware to Bunnings. When Wesfarmers ((WES)) still owned Coles Group ((COL)), as well as Bunnings, Metcash had a clear competitor. But since Wesfarmers spun off Coles, and Woolworths’ ((WOW)) foray into hardware proved brief and disastrous, Metcash is now unique in its combination of food & liquor and hardware.

Yet still the company finds it difficult to outdo the big guns. At the first of two investor days last week, Metcash updated on trading conditions over the ten months to late February. While group sales were up 0.9% year on year, food sales fell -1% over the period, compared to Woolworths – up 1.5% for the first seven weeks of 2024 – and Coles – up 4.9% for the first eight weeks, Citi notes.

Like-for-like sales were down -2% for Independent Hardware Group (IHG) and -1.8% for Total Tools, while Bunnings sales are forecast by Citi to rise 1% in the second half FY24.

But the new management team has not been sitting around drowning its sorrows.

Investing for Growth

For starters, Metcash has announced the rollout of a media business, no doubt similar to those already established by Coles and Woolworths, which basically markets to customers via social media and what have you. It’s early days for Metcash.

The company also plans to roll out 20 new food stores, 5 new IHG stores and 10 new Total Tools stores. This will require increased capex – more so than Macquarie expected – but likely to drive network improvement and revenue growth, the broker suggests.

Back in February, Metcash announced the acquisitions of foodservice distribution business Superior Food Group, Bianco Construction Supplies and framing and truss operator Alpine Truss, for a combined outlay of -$560m, for which the company implemented a capital raising of $360m.

Macquarie sees Superior Food as a key asset to open up the $21bn foodservice market to Metcash, and suggests the wholesale business model will marry well with Superior's customer base. The acquisitions of Bianco and Alpine continue the company’s investment in the hardware space and consolidate the group's trade position in South Australia, the broker notes.

The second investor day had analysts trotting about the countryside on a tour of various hardware outlets and one IGA store. A highlight was the announced introduction of electronic shelf labelling at Total Tools stores nationally, which would be the first Australian retailer to do so, UBS notes.

ESL allows for instant price changes, instead of around three weeks in some instances, to match competition and incorporate supplier price rises, and to reduce costs in labour and markdown management.

In food, the IGA retailer and Metcash relationship is all about “healthy friction”, UBS discovered, to achieve the optimum outcome, as was noted by the IGA retailer as a positive. IGA retailers are also looking forward to a new distribution centre at Truganina, in Melbourne’s fringe, with Metcash noted as having the lowest-cost delivery into store.

Responses

UBS retains a Buy on Metcash given food resilience, a strong Total Tools outlook – Total Tools has proven quite the success for the company to date — and group benefits to assist growth.

Macquarie had been on research restriction, having been involved in the capital raising, but has returned with an Outperform rating (previously Neutral).

Macquarie suggests growth opportunities through a wider addressable market in the Superior Foods and hardware acquisitions, alongside increased reinvestment into the existing business, have Metcash set up for growth over the medium term.

Supermarkets are likely to see volume benefits as inflation eases, Citi suggests. However, Citi believes other supermarkets are better placed to take market share in this environment given a swing back from local shopping (IGA was a beneficiary of covid lockdowns and restricted movement), more robust eCommerce capabilities, and unfavourable price perception for convenience in a high cost-of-living environment.

Citi retains a preference for Coles and Woolworths and has a Neutral rating on Metcash.

Outside of brokers monitored daily by FNArena, Goldman Sachs also retains Neutral, given still intense competition in both food and hardware, and specifically the softer volumes in hardware which could imply a second half earnings impact.

While the new management team has deep experience individually, Goldman notes, there may be an incubation period as they form a cohesive high performing team and execution risk remains in the interim as the business navigates significant organic and inorganic change.

Jarden suggests Metcash's recent investor days have highlighted the company's scale, diversification and attractive growth outlook, which the broker believes is not fully reflected in the current stock price. Jarden believes Metcash is in its strongest position in more than fifteen years, being a top three player across all of its verticals with scope for market share gains.

Jarden also found the outlined strategic focus clear, consistent and measured, and likely to deliver upside to synergy targets. This broker has an Overweight rating.

Four brokers monitored daily cover Metcash, for a mix of three Buys or equivalent and one Hold. However, Ord Minnett (Add) has not updated on the investor days. The consensus target is $4.14.

Goldman Sachs has a target of $3.90 and Jarden has $4.20.

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