Metcash Negotiating A Tougher FY27 Outlook

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

Metcash’ FY26 result met consensus but earnings headwinds and a tougher environment in food and hardware lead to consensus downgrades for FY27.

• Metcash’ FY26 result in line with guidance and consensus
• Higher D&A the main drag on FY27 earnings
• Expansion into more food & liquor retail a positive
• Hardware facing headwinds

By Greg Peel

Metcash ((MTS)) operates as a (mostly) wholesale grocery and alcohol business, plus hardware chain. The company had provided an update and pre-announced FY26 (April year-end) numbers in May, hence this week’s result proved in line with guidance and consensus on the profit line.

Sales rose 0.7% in the period while earnings fell -0.8%, but this was ahead of consensus on lower Food and Corporate costs.

Food earnings grew in 7.0% in FY26 due to higher Supermarkets earnings, with cost savings mix driving earnings margins higher. Foodservice & Convenience saw lower margins due to competition & higher D&A.

Hardware & Tools earnings fell -2.7% in FY26 with Hardware down -7.0% due to retail margin compression, while Tools rose 3.7%.

Retail earnings fell in both Hardware and Tools due to the tough industry backdrop, including lower private dwelling commencements and RBA cash rate hikes, UBS notes, as well as an overweight position in Victoria and Tasmania.

Metcash outlined a strong start to FY27 in hardware, with FY27 liquor margin guidance of 2%, stabilisation in tobacco and food sales growth of 5% year on year ex-tobacco in June, albeit below the consensus FY27 forecast run-rate.

Earnings Headwinds

Despite a resilient start to FY27, the FY26 result highlighted multiple earnings headwinds.

These included a -$10m impact related to tobacco excise, a sequentially lower earnings margin guided in Liquor, higher corporate costs, double-digit growth in D&A, and materially higher net interest expense.

FY27 D&A is forecast to increase by low single digits, some $20m higher than market expectations. Tobacco is expected to be a -$10m drag (consensus -$5m), net interest is $8m higher and overheads $5m higher.

Together, these represent a circa -10% downside impact to earnings, Jarden points out.

Jarden notes the bulk of the additional cost is D&A, with the key question being what the return on invested capital is on this? With some $13m consisting of cyber and IT investment, Jarden expects the earnings uplift will be muted.

Medium term, the key piece of new news from the result was hardware “through the cycle” targets, which Jarden estimates implies a 30%-plus lift in hardware earnings versus FY26.

But it won’t be an easy road.

Tough Outlook

Early FY27 sales growth in the hardware division was strong and FY26 earnings met company guidance.

Ord Minnett notes, however, that trade demand, which accounts for circa 60% of the hardware division’s business, has long lead times for construction and building work.

This means the hardware division’s firm trading environment reflects last year’s RBA rate-cutting cycle rather than this year’s tightening cycle, not to mention taxation changes in the federal budget that lessen housing’s investment appeal.

Ord Minnett thus anticipate broader hardware trading conditions will deteriorate within 6–12 months, while the refreshed trade loyalty program of rival Bunnings’ ((WES)) will add another degree of difficulty.

Citi is concerned falling house prices and rising building materials cost inflation could further dampen construction activity.

The key food operations are running relatively well in the face of cyclical rather than structural issues, Ord Minnett notes, as headwinds from falling tobacco sales ease and the gap in pricing with Coles Group ((COL)) and Woolworths Group ((WOW)) closes.

The Superior Foods acquisition continues to underperform on Ord Minnett’s estimation, noting Metcash no longer breaks out its earnings separately.

Retail Ambitions

A key strategic focus for Metcash has been transitioning towards higher margin, direct retail earnings streams rather than wholesale.

This has been progressively achieved, with retail now some14% of earnings, Macquarie notes, rising from 9% in FY20.

Looking forward, management announced a long-term target to own 25%-30% of IGA network revenue via a “targeted range of store acquisitions”, which will see an acceleration of direct retail revenue.

Progressive acquisitions of IGA stores present a series of positive catalysts, Macquarie suggests, although will still take time for these to become meaningful to the P&L.

This does not include the 30% minority interest in Ritchies, the largest independent supermarket chain in Australia, with the remaining 70% able to be “put” to Metcash (via a put option).

UBS suggests the retail network sales target is a positive for margin and cash realisation, yet requires capex of $40m-$60m per annum by FY30 and carries execution risk as supermarket retail capabilities are to date unproven.

Jarden questions whether capex would be better allocated to online.

Worse Before Better

Jarden sees Metcash as a good business that, over the past three years, has proven it is not facing structural challenges, can grow market share and has the potential to expand further down the value chain through higher multiple retail.

Jarden believes the company managed business well in the second half despite factors outside its control in housing and the Middle East conflict.

Metcash is, however, still a wholesaler that competes against vertically integrated players such as Coles, Woolworths, Endeavour Group ((EDV)) and Wesfarmers — all of which Jarden expects to increase competitive pressure.

Nevertheless, with topline trends improving (ex-supermarkets), and expectations of a housing recovery in 2028, Jarden retains an Overweight rating with a $3.70 target, down from $3.90.

Despite downgrading earnings forecasts, UBS retains Buy, given a resilient and more diverse Food business with customer growth a positive for Liquor, Hardware & Tools poised for a recovery with sales strong, dividend yield, and valuation support.

UBS’ target falls to $3.40 from $3.50.

Macquarie retains Neutral while increasing its target to $3.20 from $3.00, believing management is executing well against its strategic priorities.

However, Macquarie warns, broader conditions suggest a mixed outlook. In particular, supplier inflation implies difficulty in maintaining the “IGA Price Gap”, plus conditions are likely to weaken in Hardware due to lower housing turnover.

Ord Minnett views Metcash’s focus on higher-margin sales as a sound strategy, but the key concern is a weakening environment for the hardware business, with the risk of network operating deleverage as trading conditions deteriorate.

Ord Minnett cuts its recommendation to Hold from Buy despite apparent value on offer. Target falls to $3.50 from $3.70.

Morgan Stanley has an unchanged Equal-weight rating and $3.20 target.

Suggesting conditions are likely to get worse before they get better, Citi retains a Sell rating and $2.80 target.

That leaves one Buy or equivalent, three Hold and one Sell rating among the five brokers monitored daily by FNArena covering Metcash (Jarden not included).

The consensus target has ticked down to $3.22 from $3.24.

At the time of writing, Metcash shares are trading around $3.07, leaving a gap of 4.9% to FNArena’s consensus target of $3.22. 

On current consensus forecasts, forward-looking dividend yields are 5.7% and 5.8% respectively on projected payouts of 17.5c and 17.9c.

Paying subscribers can find more details via Stock Analysis on the website.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms