Company Reports

Talk of interest rate cuts and impending tax cuts is sparking a rally in consumer cyclicals. We agree these factors improve the near-term outlook for consumer spending, with cyclical retailers more exposed. We expect the combined impact of fiscal and monetary tailwinds to underpin mid-single-digit growth in total retailing sales in the medium term—compared with our estimate of only 2% growth in fiscal 2024. But underlying our near-term forecast is a significant divergence across categories, with sales in cyclicals virtually flat and defensives up 4%.

No-moat Metcash’s acquisition of foodservice distribution business Superior Food Group, or Superior, is broadly value-neutral. The transaction, subject to approval from the Australian Competition and Consumer Commission, or ACCC, implies a one-year forward EV/EBITDA multiple for Superior of 9.0 times before synergies or 6.9 after anticipated synergies. This sits around Metcash’s one-year trailing EV/EBITDA of 7.3 and looks attractive compared with narrow-moat Woolworths’ 2021 acquisition of PFD Food Services at 11 times trailing EBITDA. Also subject to ACCC approval, Metcash will make two bolt-on hardware acquisitions, Bianco Construction Supplies and Alpine Truss, which look value-neutral at implied postsynergy acquisition multiples of 5.0 and 4.8, respectively. While we think the ACCC will take a close look at the Superior merger, we expect all transactions to close as proposed, with the Woolworths transaction setting a precedent.

Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer. From the small corner shop to the local independent supermarket, Metcash acts as a co-operative, funneling independent sales volume through a single channel to derive buying power to negotiate volume discounts with manufacturers. Metcash is the fourth force in the grocery industry, with around 10% market share via its IGA banner network, while Woolworths and Coles combined account for about two thirds of Australian food retailing, and Aldi also commands a comparable market share of around 10%.

E-commerce platforms have been outperforming physical stores recently. Transaction data from National Australia Bank suggests online retail sales in October lifted 10% on last year, while total retail trade was up only 1%, as reported by the Australian Bureau of Statistics.

We maintain our fair value estimate for no-moat Metcash at AUD 4 per share. Fiscal 2024 earnings are coming under significant pressure. A weaker consumer grappling with rising cost-of-living pressures, material increases in operating expenses, and intensifying competition as stronger supply meets softer demand all make for a challenging trading environment. But shares screen as undervalued. We think the market is probably more concerned about recent market share losses in food—accounting for some 40% of group earnings, despite Metcash making inroads into hardware and liquor.

We expect only modest discretionary goods sales growth in fiscal 2024, while interest rates stay high and household incomes struggle to keep up with inflation. With demand soft, discounts and promotions abound in discretionary retail, and with wages rising as well, earnings are under pressure. But for some, cost pressures are easing. Steep declines in global food commodity prices bode well for fast-food restaurants. Quick service restaurant operator no-moat Collins Foods and master franchisee narrow-moat Domino’s Pizza screen as undervalued.

We downgrade our fiscal 2024 EPS forecast for no-moat Metcash by 5%. However, the valuation impact of our weaker near-term sales forecast is immaterial. We maintain our AUD 4 fair value estimate with shares in Metcash currently trading at a modest discount.

We maintain our AUD 3.80 fair value estimate for no-moat Metcash following first-half results and a trading update for November 2022. We continue to expect sales growth to moderate in the second half due to normalisation of consumer spending patterns, and for operating margins to decline as operating costs rise and competition intensifies. At current prices the shares screen as slightly overvalued. But on a relative value basis Metcash offers the cheapest exposure to consumer staples within our Australian retailing coverage.

Unsurprisingly, no-moat-rated Metcash reported strong sales growth for its three business segments: food, liquor, and hardware in the first half of fiscal 2021. Nevertheless, the operating leverage was greater than we anticipated, especially in hardware, and we increased our EPS forecast for fiscal 2021 by 19% to AUD 23 cents per share.

Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer. From the small corner shop to the local independent supermarket, Metcash acts as a co-operative, funnelling independent sales volume through a single channel to derive buying power to negotiate volume discounts with manufacturers. Metcash is the fourth force in the supermarket and liquor industry, with 11% market share (IGA), with Woolworths and Coles accounting for 65%, and Aldi 9%.

Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer. From the small corner shop to the local independent supermarket, Metcash acts as a co-operative, funnelling independent sales volume through a single channel to derive buying power to negotiate volume discounts with manufacturers. Metcash is the fourth force in the supermarket and liquor industry, with 11% market share (IGA), with Woolworths and Coles accounting for 65%, and Aldi 9%.

Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer. From the small corner shop to the local independent supermarket, Metcash acts as a co-operative, funnelling independent sales volume through a single channel to derive buying power to negotiate volume discounts with manufacturers. Metcash is the fourth force in the supermarket and liquor industry, with 11% market share (IGA), with Woolworths and Coles accounting for 65%, and Aldi 9%.

Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer. From the small corner shop to the local independent supermarket, Metcash acts as a co-operative, funnelling independent sales volume through a single channel to derive buying power to negotiate volume discounts with manufacturers. Metcash is the fourth force in the supermarket and liquor industry, with 11% market share (IGA), with Woolworths and Coles accounting for 65%, and Aldi 9%.

Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer. From the small corner shop to the local independent supermarket, Metcash acts as a co-operative, funnelling independent sales volume through a single channel to derive buying power to negotiate volume discounts with manufacturers. Metcash is the fourth force in the supermarket and liquor industry, with 11% market share (IGA), with Woolworths and Coles accounting for 65%, and Aldi 9%.

Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer. From the small corner shop to the local independent supermarket, Metcash acts as a co-operative, funnelling independent sales volume through a single channel to derive buying power to negotiate volume discounts with manufacturers. Metcash is the fourth force in the supermarket and liquor industry, with 11% market share (IGA), with Woolworths and Coles accounting for 65%, and Aldi 9%.

Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer. From the small corner shop to the local independent supermarket, Metcash acts as a co-operative, funnelling independent sales volume through a single channel to derive buying power to negotiate volume discounts with manufacturers. Metcash is the fourth force in the supermarket and liquor industry, with 14% market share (IGA), with Woolworths and Coles accounting for 65%, and Aldi 7%.

Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer. From the small corner shop to the local independent supermarket, Metcash acts as a co-operative, funnelling independent sales volume through a single channel to derive buying power to negotiate volume discounts with manufacturers. Metcash is the fourth force in the supermarket and liquor industry, with 14% market share (IGA), with Woolworths and Coles accounting for 65%, and Aldi 7%.

Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer. From the small corner shop to the local independent supermarket, Metcash acts as a co-operative, funnelling independent sales volume through a single channel to derive buying power to negotiate volume discounts with manufacturers. Metcash is the fourth force in the supermarket and liquor industry, with 14% market share (IGA), with Woolworths and Coles accounting for 65%, and Aldi 7%.

Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer. From the small corner shop to the local independent supermarket, Metcash acts as a co-operative, funnelling independent sales volume through a single channel to derive buying power to negotiate volume discounts with manufacturers. Metcash is the fourth force in the supermarket and liquor industry, with 14% market share (IGA), with Woolworths and Coles accounting for 65%, and Aldi 7%.

Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer. From the small corner shop to the local independent supermarket, Metcash acts as a co-operative, funnelling independent sales volume through a single channel to derive buying power to negotiate volume discounts with manufacturers. Metcash is the fourth force in the supermarket industry, with 14% market share (IGA), with Woolworths and Coles accounting for 65%, and Aldi 7%.