Australia | Jun 24 2020
Metcash has gained market share in grocery since the start of stockpiling in March and while an easing of restrictions may diminish gains going forward, some of the changed habits may stick.
-New customers generated from the pandemic restrictions
-Slowdown in comparable food sales growth likely in second half
-Hardware acquisitions consolidating Metcash's position in trade
By Eva Brocklehurst
Momentum is improving for Metcash ((MTS)) although the company's FY20 result reflected elevated operating costs towards the end, amid the recent stockpiling during the onset of the pandemic restrictions.
Credit Suisse suspects the result has probably missed more optimistic expectations but there was enough in the food division to support a solid outlook for FY21. The broker underestimated the additional costs required to meet the spike in demand, and profit leverage was therefore significantly lower than usual.
CLSA notes, while operating cash flow appeared very weak it was temporarily affected by significant investment in inventory in order to service the sales growth currently being achieved.
To date first half sales have accelerated, with grocery up 17%, liquor up 5.5% and hardware up 9.4%. The pandemic has provided new customers which, coupled with price investment, should improve medium term sales. More broadly, Ord Minnett points out Metcash is benefiting from a food retail industry where inflation is occurring and competition, while aggressive, is not irrational.
Metcash has gained market share in grocery since the start of stockpiling in March as shoppers favoured smaller stores, closer to home, that were outside of high-traffic shopping centres.
Credit Suisse believes the structural headwinds for IGA retailers will continue but also notes the potential for some permanence in localised shopping, which is of a strategic benefit to the independent grocery sector. Localisation, along with online expansion (of benefit to the large supermarket chains), are the two features of the current restrictions which are, presumably, going to continue to some extent.
However, Citi is more sceptical, believing the competitiveness and habitual nature of grocery shopping will mean shoppers return to their typical patterns over time and sales for Metcash will return to market levels.
UBS suspects Metcash is still facing a structural loss of share over the medium to longer term, although with a robust market backdrop and the independent grocers winning share this is more than priced in.
Morgan Stanley believes the stock warrants a higher multiple compared with history, given its diversification and balance sheet strength. The broker lifts FY21 estimates by 6% to reflect a modest increase in anticipated food earnings.
Under normal circumstances, Credit Suisse would assume a 6% earnings margin on incremental sales and estimates Metcash achieved 2.0% in the second half of FY20. While incremental margins were disappointing, management has indicated an improvement should occur as the profile is more predictable going forward compared with March and April.
Citi estimates sales growth was 25% in April before moderating to 17% over the past seven weeks. Some of the tailwinds are likely to dissipate over the rest of the first half of FY21 and the broker forecasts 5% underlying growth, in line with the market.