Kicking the habit

TRADING UPDATE

Need To Know

• Sales growth slowing, but so is inflation.
• Total Tools performing strongly.
• MTS still cheap at 12x FY24 EPS.

Investment Implications

The annual meeting for Metcash included a trading update showing steady sales trends across the group. Inflation appears to be easing gradually, but shoppers are counting their pennies.

For the 18 weeks of trading in FY24 so far, MTS sales growth is up 1.7%. This is split between Food (excluding tobacco) +6%, Hardware +3.2% and Liquor +1.7%, all compared to the same period last year.

Total tobacco sales have fallen -11% creating a drag on total food sales. Including this decline, total food sales growth was +1.1%. An increase in illicit tobacco trade and a general decline in smoking are the main factors.

MTS noted that more shoppers are sniffing out bargains, discounts and promotions as they search for as much value as possible.

Inflation has been steadily falling. Wholesale price inflation clocked 7.3% for the first 18 weeks of FY24, bookended by 8.0% in May 2023 and 6.1% in August. We expect packaged food inflation to keep falling into 2024 as fewer suppliers are planning price rises.

Liquor sales growth of 1.7% is being watered down by fewer on-premise sales. Customers are looking for value options and are generally spending less in-store.

Hardware sales growth of 3.2% is being boosted by the growth and expansion of the Total Tools business which enjoyed sales growth of 23.1% ytd. The core Independent Hardware Group sales fell -1% ytd despite strong wholesale trade sales growth. Retail network sales increased 1.1% as DIYers (+1.8%) outspent trade customers (+0.5%).  

MTS did not provide any earnings guidance update but warned of the impact of higher interest rates and cost of living on consumer spending activity. This would surprise no-one, but the important question is how the company manages its costs and capex plans to mitigate a slower period of sales growth.

Investment View

This softer period of sales growth was well anticipated given the very strong sales growth experienced throughout the COVID-19 bubble. MTS was able to maintain its market share in Food and has embarked on a group improvement plan to sustain the momentum.

MTS continues to trade at a big PE ratio discount to WOW, averaging ~14x over the last 5 years. Hence, at 12x FY24 EPS, we think MTS looks cheap and retain our Buy recommendation.

Figure 1: MTS PE ratio