The pandemic swayed many consumers to shop more locally, and it has become a habit. The 53-week year produced a good result for Metcash, boosted by inflation with the higher margin Hardware division standing out. The company’s competitive position is getting better which bolsters its outlook.
MTS has gained market share and held it across all divisions. In the highly competitive spaces in which it operates, MTS was able to improve market share in supermarkets and to outpace the hardware and liquor industries during FY22. Capitalising on the share gain, MTS increased its pricing and its store network in each division.
Although it has lost some accounts, MTS’s underlying supermarket share has been steady at around 13% while higher pricing and a stabilised store count have contributed to the market share gain.
Hardware sales increased 20.5% in FY22 reflecting strong growth in IHG, Total Tools and an expanded store network. The IHG segment includes the Mitre 10 wholesale and corporate stores which have seen growth accelerating in the last 6 months. A skew of sales to trade (64%) and a backlog of building work is helping to stave off a decline in sales. The Total Tools business experienced an excellent 160% sales growth in FY22 and contributed EBIT of $64 million for the year, double its FY21 contribution. MTS noted it had acquired 10 frame and truss outlets in FY22.
Liquor sales are slowing but remain ahead of the industry on a two year basis. The number of bannered stores has increased by 14% and the price position has improved relative to competitors.
The first seven weeks of trading in FY23f were very good. While that is encouraging, we think sales will begin to slow against very high comparisons from last year which were boosted by lockdowns. Logically, higher interest rates will also temper consumer spending more generally.
MTS is guiding to capex of $190-220 million in FY23f. This includes both investment and acquisitions and we expect this to remain around this amount for the next three years. The company announced a new $70 million DC in Victoria will be built to replace an existing facility. We anticipate most of the acquisition activity will be in hardware and mostly related to Total Tools.
The decision to spend more on capex could prove to be worthwhile given the high return on funds employed (25% in FY20, 31% in FY22) being generated. The future ROFE might be slightly more modest given the elevated earnings base from FY22 could be difficult to sustain.
Investment view
The investment case for MTS is much improved in the last few years with a stabilised wholesale grocery business complemented by a hardware division in growth mode. The pandemic certainly boosted sales and customers discovered that shopping locally is actually quite good, particularly with the improvements being made to stores and the full shelves of inventory.
The hardware division is providing some good growth options for MTS and new CEO Doug Jones is ramping up the group capex to take advantage of an elongated building cycle and the steady market share in supermarkets.
Risks to investment view
MTS operates as either the second or third largest player in its markets and is therefore susceptible to decisions made by its competitors. Inflation is beneficial for MTS as long as price competition remains rational. Hardware is cyclical and can be volatile.
Recommendation
We have retained our Buy recommendation.
