Australia | Sep 02 2021
This story features METCASH LIMITED, and other companies. For more info SHARE ANALYSIS: MTS
Regardless of a confusing set of numbers in the early FY22 trading update, Metcash is holding market share in food and benefitting from liquor and home hardware purchases
-Re-emergence of lockdowns once again favours localised shopping
-Metcash screens favourably relative to peers for valuation and dividend yield
-Strong market share gains for the Independent Hardware Group
By Eva Brocklehurst
With lockdowns returning in NSW, ACT and Victoria, Metcash ((MTS)) has provided a confusing set of numbers at its update regarding the first 16 weeks of FY22, and interpretation of the trends largely depends on where the emphasis is placed.
As Citi explains, the trading period included eight weeks of normal trading in the greater Sydney region followed by eight weeks of lockdown, as well as various lockdowns in Melbourne.
The first eight weeks captured an unwinding of localised shopping that benefits the Metcash-supplied Independent Grocer (IGA) chain, and the subsequent eight weeks reflected a re-emergence of the tendency as lockdowns came into effect.
One enduring positive, Citi flags, is that pandemic-related costs have been well managed and remain immaterial at this stage. UBS believes, given the significant variance in sales growth rates, analysis of performance is best done on a two-year "stack" basis.
In this instance, all divisions improved over the first 16 weeks of FY22, with the exception of liquor that was hampered by hotel closures. In looking over the two-year period, wholesale food sales increased 12.9% for Metcash, which Credit Suisse asserts is greater than for Coles Group ((COL)) over the same period.
Conditions are less likely to be favourable for Metcash once lockdowns are lifted, the broker adds, and some market share is likely to be regained by the major supermarkets, although Metcash appears to have retained most of the gains made in market share in FY20.
Jarden also notes supermarket sales were negative for the final eight weeks of the 16-week period compared with both Woolworths ((WOW)) and Coles which had stronger sales, suspecting this reflects some normalisation of market share, as well as the cycling of more challenging comparables for the IGA supermarkets.
Macquarie asserts one quirky outcome of the lockdowns is that Coles and Woolworths appear to have regained share, as consumers appreciate the larger floor space, as opposed to small format IGA stores, particularly in NSW where cases of coronavirus have grown quickly.
While some normalisation of market share was always likely, Jarden argues the market continues to “overprice” this feature. UBS, too, expects some normalisation of industry drivers yet remains confident that some consumers have changed their habits permanently, while the independent retailers are investing profits from strong sales back into their stores.
Driving the improvement from an industry level is a shift to neighbourhood shopping, consumption of food and liquor at home, home renovations and lack of overseas travel.
The company's efforts have included investment in the store network which should further support volume retention. Yet Metcash has a more limited online offering compared with its larger competitors which indicates its growth is more store-based.
Meanwhile, Metcash has raised its off-market buyback to $200m from the "up to $175m" originally set out in June. Macquarie assesses, coupled with the FY21 total dividend of 17.5c, the pay-out ratio has increased to 80% from 70% and roughly $380m in capital will be returned to shareholders.
This, in turn, reflects record operating cash flows for FY21 and increased confidence in future cash generation. Credit Suisse also considers the stock screens favourably relative to peers in terms of valuation and dividend yield.
In liquor retailing Metcash is also growing faster than competitors, indicative of ongoing local demand and, UBS points out, a positive aspect considering hotel closures. Current trading in liquor shows sales growth for Metcash of 1%. In comparison Endeavour Group ((EDV)) has flagged liquor sales declining -1.7% over July/August while Coles has had no growth over the period.
Off premises sales rebounded as lockdowns hit the liquor market and Jarden believes the market is continuing to value Metcash as a structurally-challenged food wholesaler but its business has changed materially and, therefore, it should re-rate.
One thing brokers agree on, hardware was a highlight of the update. With accelerating trading over the last eight weeks and year-to-date sales up 16.3% this is a strong result relative to Bunnings ((WES)), Jarden points out, which recorded a moderation of sales.
Citi argues the Bunnings trading update would have entirely captured the greater Sydney lockdown so the divergent outcome is not surprising. The Metcash Independent Hardware Group has benefited from a skew to trade and with more stores remaining open.
Credit Suisse notes little negative impact from the pandemic despite disruptions to the construction sector. Again, looking at a two-year comparison hardware has shown strong market share gains for IHG, excluding Total Tools, 22.7% above the corresponding period in FY20.
Jarden, not one of the seven stockbrokers monitored daily on the FNArena database, has an Overweight rating and $3.90 target. The database has four Buy ratings and one Hold (Macquarie). The consensus target is $4.26, suggesting 6.8% upside to the last share price. The dividend yield on FY22 and FY23 forecasts is 4.4% and 4.5%, respectively.
See also, Does Metcash Deserve A Re-Rating? On June 29, 2021.
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