Australia | Oct 19 2022
This story features METCASH LIMITED. For more info SHARE ANALYSIS: MTS
Metcash is ramping up capital expenditure as the new CEO seeks to reinvigorate the MFuture strategy.
-Metcash's strategic plans include higher capital expenditure near-term
-Consumers continue to shop local as Metcash gains market share
-Momentum for Hardware division slowed, but origin not clear
By Danielle Austin
In its first strategy update under the new CEO, Metcash ((MTS)) has announced intentions to accelerate store openings for its food division and continue to roll out store openings for its hardware division in an update to its existing MFuture strategy.
The company also aims to retain food market share gains made throughout the pandemic and remain competitive on value, while reinvesting in its hardware network.
It was announced that capital expenditure for the year would lift to -$250m from a previous range of -$190-220m, a 22% increase. Ongoing store renewal programs have delivered a 15% sales uplift in the food segment and a 25% uplift in hardware.
Off the back of positive results, Metcash announced an equivalent program for its liquor division, but is yet to provide cost guidance. The company targets between 100-130 store upgrades annually over the next five years.
The company shared some financial insights for the year-to-date trading period, essentially covering the first half of FY23.
Group sales rose 7.7%, comprising 1.5% growth in the supermarket division, 12% growth for the liquor division and 17.1% growth in hardware. Weakness in supermarkets was offset by strength in liquor, which demonstrated recovery in on-premise demand and ongoing strength in retail, while the strong hardware performance was as expected as store rollouts continued.
Total supermarket growth implies division momentum turned negative in the latter six weeks of this period, cycling deeper lockdowns in the previous comparable period. Hardware also appears to have slowed in the last six weeks, but it is unclear if this is due to slower store expansions or a real slow down in like-for-like sales momentum.
Brokers largely positive on outlook despite spending increase
The four database brokers who cover Metcash have updated with two equivalent Buy and two equivalent Hold ratings. Between them, these brokers have an average target price of $4.49, ranging from $4.16-$4.80.
Ord Minnett (Buy, target price $4.18) finds all three divisions to be demonstrating good momentum and winning share. The broker anticipates Metcash will continue to gain ground on competitors, but has reduced its earnings forecasts through to FY25 following the company’s guidance for higher capital expenditure.
The broker expects fundamental improvements in both the company and its customer base are likely to result in structural market share gains. Ord Minnett anticipates capital expenditure to revert to -$135m annually in the long term following completion of investments.
While Citi (Neutral, target price $4.40) sees negative read throughs for the wider supermarket industry from Metcash’s update, the broker did find the company’s market share gains a positive. Post the update, Citi finds consensus estimates for the liquor and hardware divisions conservative.
Despite its rating, Macquarie (Outperform, target price $4.60) remains cautious on Metcash’s outlook as rising rates and inflation impact further on household budgets in the new calendar year. The broker warned supply chain and labour costs, as well as labour shortages, remain a challenge, while noting availability in supply chains is improving.
Credit Suisse (Neutral, target price $4.16) finds it unlikely the stock will outperform near-term, but notes indications of resilience in independent retailer market share are a positive.The broker highlighted tobacco sales, to which Metcash is overexposed relative to the market, continue to drag on sales.
Outside of database coverage, comments by Goldman Sachs (Neutral, target price $4.10) and Jarden (Overweight, $4.20) are largely echoing the other brokers. Both highlighted the strategy update repositions the company for organic and inorganic growth, and should de-risk the business, albeit at a higher capital expenditure cost.
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