Metcash Beats, Readying For FY23 Challenges

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After Metcash delivered FY22 results ahead of expectations, brokers assess the impact from cost of living pressures and a turn in the housing cycle.

-FY22 results for Metcash exceed expectations
-Food inflation assists earnings
-Consumers continue to shop local
-Hardware sales rise by 20.5%
-Brokers weigh cost of living/housing impacts
 

Mark Woodruff

Wholesale distribution and marketing company Metcash ((MTS)) delivered FY22 results ahead of consensus expectations, with signs that market share won during covid may hold longer than the market had expected.

An acceleration in fourth quarter Food sales and market share was the key takeaway for Credit Suisse. The company’s earnings are significantly more leveraged to food inflation than the chain retailers. Hence, whilst inflation potentially increases the market share challenge, profit leverage at wholesale should also increase, explains the broker.

Hardware and Liquor earnings were also strong, though considered in-line with overall industry strength.

In addition, group sales were up 8.6% for the first seven weeks of FY23, with Food division sales rising by 5% as covid consumers continue shopping local post lockdowns.

Following the Total Tools acquisition, Hardware sales rose 20.5% on the previous corresponding period (pcp). Management pointed to an extending pipeline for construction activity as unfavourable weather and tight labour conditions delay work. While Macquarie notes some softness in DIY volumes, this tends to have less impact on the more trade-focused Metcash.

Food sales for FY22 increased by 1.4% on the pcp, driven by stronger supermarket sales. Liquor sales also increased by 8.7% aided by the shop local thematic and less duty free purchases as a result of reduced overseas traveling by consumers, explains Macquarie.

While raising earnings forecasts, two brokers downgrade their ratings for Metcash. Credit Suisse moves to Neutral from Outperform after applying a lower multiple to the Hardware segment and increasing its rate for the weighted average cost of capital (WACC) metric.

Jarden, not one of the seven brokers updated daily in the FNArena database, lowers its rating to Overweight from Buy following recent share price outperformance and early signs of DIY moderation in Hardware, which now comprises around 60% of the broker's overall valuation for the company.

An unfranked final dividend of 11cps was declared, taking the full-year payout to 21.5cps, which compared to the consensus estimate of 19.1cps.

Will cost of living rises have less impact?

While Ord Minnett believes a pronounced shift towards value by consumers would be detrimental for Metcash, the company is better positioned compared to pre-covid.

The broker estimates management has narrowed the price gap with rivals Woolworths Group ((WOW)) and Coles Group ((COL)) over the past five quarters, due to programs such as Price Match and Low Prices Every Day.

UBS agrees cost of living pressures should be less of a headwind as was traditionally the case, as a result of a better private label offering and increased store investment. Importantly, it’s felt the company is not over-earning in the value chain versus its retailers.

Outlook

Citi feels the prospect of further earnings upgrades for Metcash is more limited. It’s thought Hardware will slow into FY23, given the weakening housing cycle, with new Total Tools stores also likely to be less productive than earlier stores.

Additionally, Food market share is expected to normalise over time given a likely shift to value and increased foot traffic in cities and shopping centres, which will favour the majors. While the broker retains its Neutral rating, the target price rises to $4.40 from $4.20.

On the other hand, Buy-rated UBS (target price $5.00) is more upbeat and notes the boost from shopping local is continuing and is arguably entrenched, solidified by store investment by independent retailers.

FNArena’s database has five broker ratings with two Buy ratings (or equivalent) and three Holds, and a consensus target price of $4.69, which suggests 12.3% upside to the last share price. On current consensus projections, freshly updated today, the shares offer a forward-looking dividend yield of 5% and 5.2% respectively for the two financial years ahead.

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