Stable market share in food together with a pinch of inflation is a positive scenario for Metcash. A surge in renovation activity is positive for its hardware business which is skewed towards trades.
MTS is often an afterthought in the supermarket industry with its IGA franchises battling away in the suburbs against the giants from Woolworths, Coles and Aldi. But that does not give credit to a business that has stabilised its market share, has closed fewer IGA stores and has moved on from the loss of the Drakes and 7-Eleven contracts.
We estimate that MTS's core supermarket business has increased its sales by 13% on two years ago. Its market share stabilisation is due to a flat store count and IGA retailers have invested in refurbishments and pricing so they can be more competitive. It has also helped that store rollouts from rivals have been slower than usual.
Price inflation is beginning to hit the headlines again, and MTS is likely to be a beneficiary in its food and hardware businesses. As a distributor, inflation is positive for MTS as its fees are typically tied to nominal revenue levels. It can also benefit from making stock profits on its inventory.
MTS's hardware division is made up of its Mitre 10 wholesaling, Mitre 10 corporate stores and Total Tools segments. Each of these has growth ahead as the construction industry continues to fire. We expect Hardware to be a larger part of future MTS group earnings as a consequence. Given its 60% skew to trade and the continued rollout of the Total Tools stores, we think
MTS's hardware business will see a sustained period of growth ahead.
Investment view
There are two reasons why we recommend MTS as a Buy. First, we think consensus earnings forecasts are too light over the next two years. Second, MTS is trading at a larger than usual discount to WOW. In order to see a re-rate of MTS's PE ratio, the company must maintain its market share in food and provide more transparency within its hardware division which is now more complex.
Inflation is rising in Australia and MTS will be a beneficiary in food and hardware.
MTS's food earnings are susceptible to strategic choices made by its larger competitors and the current rational behaviour can quickly change. MTS generates about 30% of food revenue from tobacco which has been a source of growth given elevated excise taxes in recent years. Black market trade in tobacco is a risk for MTS.
The current environment is working well for MTS with stable market share in food, an extended period of higher activity in hardware and an inflation boost to boot.
