By the end of the trading session, on 5th December 2019, the benchmark index i.e. S&P/ASX200 was at 6683, with a rise of 1.1% from its last close. In the below article, we will be having a look at one of the ASX-Listed wholesalers to retailer - Metcash Limited, who provides its services to retailers such as food, grocery etc. and also look at why this company is it making headlines.
Metcash Limited (ASX: MTS) is a wholesaler to independent retailers in food, grocery, liquor, hardware and automotive industries space.
Group sales rose by 0.5 % during Half-year results
On 5 December 2019, MTS posted 6 months results ended 31 October 2019, a few highlights from the same are as mentioned below:
- Group sales rose 0.5 % to stand at $7.2 billion.
- Total Food pillar sales (consisting of charge- through sales) grew by 1.2%, along with Supermarkets wholesale sales ex tobacco recorded positive doe the first time since financial year 2012.
- Liquor provided sixth consecutive year of earnings growth.
- Trade-focused Hardware pillar kept on performing well in spite of challenging trading conditions.
- For the six-month period, the company recorded loss after tax standing at $151.6 million consisting of an impairment $237.4 million (after tax).
- Underlying profit after tax stood at $95.7 million compared to 1H19 period, which recorded $100.3 million.
- MTS declared a dividend of $0.06 for the period, with an ex-date of 17 December 2019 and record date of 18 December 2019.
Source: Company’s Report
Impairment of intangible and other assets
- The company through a release dated 3rd December 2019 announced that its financial statements for the half year ended 31 October 2019 would be recognising an impairment amounting to $237.4 million (post tax) to goodwill as well as other assets in the Food pillar.
- It was mentioned that impairment follows MTS’ review of the carrying value of its assets, that have been undertaken as part of its process for preparation of the financial statement for 1H FY20.
- MTS stated that the review has considered advice of 7-Eleven that there would be no renewal for the current supply agreement with the company after its conclusion, which will happen on 12th August 2020.
- This advice is anticipated to result in the loss of around $15 million EBIT in the Food pillar, after adjusting for mitigating costs savings.
Advise by 7-Eleven
- As mentioned earlier, 7-Eleven will not provide any renewal to the current supply agreement after its completion on 12th August 2020.
- It was mentioned in the release dated 22nd November 2019 that the supply requirements of 7-Eleven for the east coast, which include delivery routes and scheduling was not fulfilled by the company
- The company remains in discussions with 7-Eleven to continue supply in Western Australia, as well as several smaller categories on the east coast.
- Total Convenience annual sales stood around $800 million to 7-Eleven, which include lower margin tobacco sales.
- In addition, the company would be assessing opportunities in order to help offset the future earnings effect of advice, which have been provided by 7-Eleven.
Change in Substantial Holdings
- The company recently announced that Bank of America Corporation and its related bodies corporate has become a substantial holder in the company on 11th November 2019 with the voting power of 5.00%.
- In another update, it was mentioned that Pendal Group Limited has made a change to their substantial holding in the company on 22nd October 2019 and its current voting power stands at 10.31% as compared to the previous voting power of 11.38%.
- When it comes to the interest of the directors of MTS, Peter Alan Birtles acquired 40,000 fully paid ordinary shares at the consideration $119,900.00 on 20th September 2019.
Highlights of Chairman’s Speech
The Chairman of the company addressed the Shareholders and stated that in FY19 period closed 30 April 2019 MTS reported solid financial results, as well as continued to successfully execute its key strategic initiatives.
- For FY19, underlying profit after tax amounted to $210.3 million, reflecting a marginal fall as compared to the previous year. The underlying earnings per share witnessed a rise of 1.8% to 22.6 cents, indicating the benefit of the $150 million share buy-back, which was carried out in August last year.
- Despite difficult market conditions solid earnings and cash flows were delivered by all Pillars. The company continue to be well placed with a strong balance sheet.
- The Board of the company declared a final dividend amounting to 7.0 cps, this took the total dividends for the year to 13.5 cps, reflecting a rise of half cent against the prior year.
- The company possesses clearly defined five-year strategy named as MFuture. The program would continue to have a robust focus on costs.
- The new program also encompasses a solid emphasis on increasing its revenue and consists of substantial investments to enhance the competitiveness of its food, liquor and hardware retailer networks.
- The Chairman added that the integration of Home Timber & Hardware is now mainly complete, with the delivery of further synergies supporting strong earnings growth in Hardware, despite softer construction activity in the 2H of the financial year 2019.
Trading Update for Q1 FY20
- The company has been witnessing a continued improvement in the sales trajectory through the first quarter of FY20, while the market remained highly competitive, where total food sales witnessed a rise of 0.6% in comparison to pcp and supermarket wholesale sales decreased by 0.5% against pcp.
- The company also entered into a 5-year supply agreement with Drakes Supermarkets in Queensland; however, it anticipates ceasing supplying Drakes Supermarkets in South Australia once their new DC becomes operational, which is anticipated to be 30th September 2019.
- During Q1 FY20, the premiumisation consumption trend has continued and reported a rise of 0.7% as compared to pcp in total liquor sales.
- Sales in Q1 FY20 are lower than pcp, showcasing the loss of a major customer in Queensland (QLD) and a slowdown in trade sales.
Outlook for the year ended 31 October 2019
- In food segment, the group would keep on seeking opportunities to exit onerous lease contracts, the contribution to profit in the upcoming periods in anticipated to be cut down.
- At liquor division, MTS anticipates market growth across the remaining part of FY20 period, to remain to be affected by the ‘premiumisation’ trend.
- While hardware section, the business continues to have a solid concentration on costs to aid in offsetting the influence of the slowdown in construction related work.
The stock of MTS closed the day’s trading at $2.760 per share on 5th December 2019, with a fall of 0.361% from its previous closing price. The company has a market capitalisation of $2.52 billion. The total outstanding shares of the company stood at ~909.26 million, and its 52-week low and high is $3.210 and $2.250, respectively. The company has given a total return of -5.46% and -9.48% in the duration of three months and six months, respectively.
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