MTS - Stock Update
Grocery opportunity ahead of Results (Metcash Update)
Food inflation remains a core topic with Australian retailers as it provides a potential earnings tailwind as higher food costs are passed on via higher shelf prices.
The World Food Price Index has shot to a record high this year, suggesting that inflationary pressures in grocery are likely to remain a theme for over the 6-12 months. (Figure 2)
Australian food retailers all saw a share prices pullback (~10% over the past month) due to market concerns that higher interest rates would create earnings misses – like what was witnessed in Target (TGT) and Walmart (WMT) earnings releases last week.
TGT’s and WMT’s earnings misses were broadly attributed to the inventory issues within their non-food retail businesses. This gives little investor read-through for Australian Food-based retailers in our view.
On a 1-year basis MTS has outperformed its Australian competitors (Figure 3) and is trading on a 12mth fwd PE multiple of 16x, a discount to both COL and WOW (23x and 26x respectively).
MTS has also outperformed the market (ASX200) on a 1-Year market relative basis by ~21% (Figure 4).
Despite the offshore noise in retailing over the last week, the pullback in the MTS share price presents an interesting opportunity ahead of FY22 results on 27 June. Earnings/outlook risks are biased to the upside in our view. Metcash (MTS) remains our top pick of the grocery stocks and is trading at a lower PE ratio than its competitors and offers a ~4.5% 3-year EPS CAGR. For our investment view and risks associated with the companies under Sandstone Insights coverage, see our latest research notes and disclaimers and disclosures contained therein.
Figure 1: MTS Share price performance channel.
Source: Refinitiv, Sandstone Insights
Figure 2: FOA Food Price Index at record highs
Source: Refinitiv, Sandstone Insights
Figure 3: 1 month pullback seen in Australian Food retailers
Source: Refinitiv, Sandstone Insights
Figure 4. MTS vs ASX200 (AXJO)
Source: Refinitiv, Sandstone Insights
Company overview
Metcash is a food and liquor distribution and wholesale business, and a hardware retailing and wholesale business .
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