Metcash: Strong Hardware, Weak Cashflow

Australia | Dec 08 2022

While Metcash delivered first half results ahead of expectations, brokers also weigh the impact of lower cash flows.

-First half results for Metcash exceed expectations
-Strong performances by Hardware and Liquor
-Strong earnings for Total Tools
-Cash flow slumps on higher working capital investment
-The impact of inflation on the company's business


Mark Woodruff

Wholesale distribution and marketing company Metcash ((MTS)) has delivered first half earnings ahead of consensus expectation.

The main discordant note related to disappointing cash flow, according to brokers, as stronger growth led to greater investment in working capital.

Overall, the average 12-month target price of five brokers in the FNArena database rose slightly to $4.61 from $4.59, suggesting 7.8% upside to the latest share price.

Outside of the database, Goldman Sachs and Jarden raise their targets to $4.20 and $4.40 from $4.10 and $4.20, respectively.

The company specialises in grocery, fresh food, liquor, automotive parts & accessories and has a trade-focused hardware business.

In late 2020, the Hardware division (Mitre 10) was expanded when the group acquired 70% of the shares of Total Tools, a franchisor to the largest tool retail network in Australia. This stake was later increased to 85%.

Group revenue for the first half rose by 7.8% and underlying profit increased by 9.1% on the previous corresponding period.

Outperform-rated Macquarie points out the Hardware and Liquor divisions were the key drivers of the result, with an increase in earnings (EBIT) of 15.6% and 10.8%, respectively.

Total Tools was a standout, with earnings climbing by $14m to $47m, on an earnings margin of 15.8%, which compares to the 4.9% achieved by the company’s Independent Hardware Group (IHG).

Group sales also climbed by 6.2% for the first four weeks of the second half of FY23, compared the previous corresponding period. The trading update revealed Liquor and Food sales rose by 8.9% and 4%, respectively.

The rise in Food sales is suggestive of market share gains, according to Overweight-rated Jarden, and is consistent with independent data on supermarket foot-fall.

It may not be all plain sailing, however, as management suggested all divisions remain at risk to supply chain challenges, despite a recent easing in pressures.

Also, while Macquarie notes strong ongoing demand for both IHG and Total Tools, Goldman Sachs (Neutral) sees first signs of softening in the Hardware division, with (trading update) sales decelerating to 8% due to inclement weather impacts.

Citi (Neutral) also sees potential obstacles from easing inflation, an unwind of local shopping and impacts from a housing slowdown, which may offset earnings growth from the Total Tools rollout.

A fully franked interim dividend of 11.5cps was declared, a 9.5% increase on the first half of FY22, and ahead of the consensus forecast for 9.6cps.

The effect of inflation

Ord Minnett (Buy) points out Metcash is typically considered the largest beneficiary of inflation, given its wholesaling model and fixed cost base.

A bounce-back in food sales in the latter part of the first half, which continued into the trading update period, was partly due to rising wholesale inflation, according to UBS (Buy).

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