Investment Thesis:

• Trades below the blended valuation. 
• MFuture benefits to help margins and customer value which in turn will drive sales growth. 
• Food inflation in core categories (Food, Liquor and Hardware).
• Acquisition synergies have already been achieved and in line with expectations.
• Competitive pressures remain however the market to remain more rational at this stage, despite meaningful players such as Coles, Bunnings (Wesfarmers), Woolworths, Aldi, Costco, and potentially in Amazon.
• Hardware is becoming a much larger part of the overall business, and this may warrant a higher valuation multiple. 
• MTS has the second largest liquor business in Australia, which exhibits defensive earnings quality. 

Key Risks:

• Further margin pressure in the core business segments with deflation being unhelpful to topline revenue.
• Any deterioration in balance sheet metrics due to earnings/cash flow pressure/decline.
• Adverse movements in AUD/USD (international sourcing).

Key Highlights:

• FY22 group results. Group revenue was up +6.4% YoY to $17.4bn, operating earnings (EBIT) up +17.7% to $472.3m, underlying NPAT up +18.6% to $299.6m and underlying EPS up +23.5% to 30.5cps, driven by earnings growth and the off-market share buy-back of $200m. On the back of strong operating performance, dividends also increased +22.9% YoY to 21.5cps, fully franked. Management continues to target a pay-out ratio of 70% underlying NPAT. Balance sheet is in a healthy position with gearing ratio of 14.8% and underlying EBITDA coverage ratio of 4.8x. 
• Easing house prices not impacting Hardware yet. MTS’ group earnings now have 39% coming from the attractive Hardware sector (up from 33% in FY21). Management noted that they haven’t seen any impact of easing house prices in Australia appear in the demand so far. According to industry data (HIA), there remains a solid pipeline of renovation in new home builds.
• Return of the value-driven consumer. Economic conditions are likely to remain subdued and could deteriorate further. the value-driven consumer will become more driven to shop around and cross shop for products to lower family cost pressures. Management believes their ongoing focus on competitive offering on a wider range of products, programs such as price-match and the newer programs around low prices every day (LPED) should assist MTS maintain competitiveness.
• Group sales up +8.6% across all segments.
• Food sales up +5.0%, with Supermarkets up +4.5%, driven by demand and higher wholesale inflation.
• Hardware sales are up +19.8%, with demand remaining strong and persisting global supply chain challenges.
• Liquor sales are up +8.6%, with recovery in on-premise sales and higher wholesale inflation.

Company Description:

Metcash Ltd (MTS) is an ASX listed consumer staple company which operates three internal divisions (“business pillars”) covering food, liquor and hardware: Metcash Food & Grocery (MF&G): MF&G is comprised of Supermarket and Convenience divisions supplying to independent stores across Australia including ~1,434 IGA branded stores and ~250 Friendly Grocer / Eziway stores. Australian Liquor Marketers (ALM): Australian Liquor Marketers (ALM), has two divisions, ALM and Independent Brands Australia (IBA). ALM serves as a broad range liquor wholesaler supplying over 12,000 hotels, liquor stores, restaurants and other licensed premises throughout Australia. IBA’s 4 national independent retail brands are Collaborations, IGA Liquor (formerly IGA Plus Liquor), Bottle-O and Bottle-O Neighborhood. Independent Hardware Group (IHG): Independent Hardware Group (IHG), is the combined entity of Mitre 10 and Home Timber & Hardware Group networks. Mitre 10 is an independent, national retail network of over ~370 bannered Mitre 10 and True Value Hardware stores. Home Timber & Hardware has a network of ~380 bannered stores including the Home Timber & Hardware, Thrifty-Link Hardware, Harding, Hardware and Hudson Building Supplies brands.

(Source: Banyantree)

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