Metcash Limited (MTS)
BUY

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Sector: Consumer Staples

FY23 RESULT

Need To Know

  • FY23 EBIT $501m, ahead of consensus $493m
  • Food and Hardware sales are resilient despite softening economy
  • Small consensus EPS upgrades expected

Considering the fragile economic backdrop, Metcash’s FY23 result was very good. Sales in Food and Hardware are trending at 7% (excl tobacco) and 5% respectively, defying market expectations of a decline in FY24f.

New CEO Doug Jones has fostered a gritty result for FY23 as all three divisions reported growth in spite of the headwinds facing customers. Excluding tobacco sales (in decline as illegal sales lift as prices rise, again), food sales have risen 7% for the full year, including a 7.5% increase in 2H23. That compares to Coles trending at 8% and Woolworths at 9% growth in recent quarterly results. Food EBIT increased 3.8% on a normalised basis, outstripping labour and freight cost growth.

The building pipeline remains sufficiently healthy so that Hardware sales increased 10.6% as DIY and trade activity trundled on. Supply availability has improved, and inflation contributed to the higher sales figure. But Total Tools revenue is noticeably slowing. TT sales increased just 1% in 2H23 compared to +23.5% in 1H23. This perhaps reflects a normalisation of post-pandemic sales growth but needs to be watched. TT now has 110 stores and is targeting 140 by FY26. The broader Hardware network of Mitre 10 and Home Timber & Hardware stores are heading towards 400 (Mitre 10 currently 364) and 200 (HTH 150) respectively in the medium term.

Liquor sales increased 8.3% in FY23 but there are signs of a slowdown and for customers to spend more frugally on value choices. Liquor EBIT increased 8.9% in FY23, despite higher labour, freight and fuel costs with EBIT margin lifting slightly to 2.1%.

MTS noted the increased taxes in Victoria (workers compensation, payroll tax, land tax) as an extra burden amounting to ~$10m in FY24.

The FY24 year has started well enough with Food sales up 6.8% ex-tobacco and hardware up 5.0% for the first seven weeks compared to last year. Liquor sales are up 1.2% in the same period.

Investment View

The company’s Horizon capex plan is mid-stream and will spend $15-20m in each of FY24 and FY25. The benefits are yet to materialise, so it is important that MTS maintains its momentum from the market share gains through COVID-19.

Sales growth may soften in FY24f as consumers pare back budgets, but the share price already reflects this scenario. At a near 60% FY24f PE discount to WOW and 47% discount to COL, MTS is trading too cheaply. We reiterate our Buy recommendation.

Figure 1: FY23 RESULT

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Stock Overview

Share Price

Company Overview

Metcash is a food and liquor distribution and wholesale business, and a hardware retailing and wholesale business .

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