The acquisition of Total Tools is really sharpening up the performance of Hardware within the Metcash portfolio. The company’s strategy is delivering earnings growth that is being overlooked by the market.
MTS’s interim result produced an underlying net profit of $146.6 million, up 13.1% on last year. On the back of an increased dividend payout ratio of approximately 70% of underlying profit, MTS reported an increased dividend of 10.5cps fully franked. MTS completed its $200 million share buyback in August this year.
The hardware division featured strongly in this result with a big increase in sales reflecting growth in trade sales (now 64% of total) and a full period contribution from Total Tools in which
MTS now owns 80%. We think hardware will outpace market growth given its heavy skew to trade customers as opposed to DIY. MTS will also acquire an additional 14 stores in December 2021 adding perhaps $45-50 million in sales.
MTS’s food segment reported a 4.9% sales decline in 1H22 with a big fall in convenience sales while supermarkets were almost flat against a very strong period last year.
MTS will have a year of higher capex around $150 million including $45 million for the new Total Tools franchised stores acquired. Longer term capex will ease back to around $100 million pa.
Investment view
MTS has a much better business mix and industry structure than historically. It has stabilised its sales in Food and has unrecognised growth opportunities in hardware which should result in a higher PE for this business.
Supply chain disruption looms as an earnings risk across the group and the spectre of further COVID imposts cannot be dismissed.
But as the economy continues to normalise, MTS is experiencing good sales as consumer behaviour improves and the MTS retail network lifts its game.
Solid supermarket sales trends have continued into the early part of 2H22f and hardware particularly will see the extended benefits of construction activity around the country.
We think MTS shares should trade at a higher multiple to reflect the bigger contribution from hardware. We are expecting upgrades to consensus forecasts and retain our Buy recommendation.
