Metcash Beats, Readying For FY23 Challenges

Australia | Jun 28 2022

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.

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