Metcash has announced the put option on the remaining 15% of Total Tools Holdings was exercised. The rapid increase in valuation of Total Tools highlights what a well-timed acquisition it was. The initial 70% stake was at an enterprise value of $81 million and this final 15% is at an EV of $677 million. While relatively small, the accounting for Total Tools will result in 2.7% EPS dilution on our estimates from this additional stake. Metcash’s Hardware division accounts for 49% of our enterprise value and the success with Total Tools is a key plank of that. We have a Buy rating and $4.50 target price.

Australian retail price inflation has been low for a long time. However, input and supply chain costs have increased substantially in the past year. What if we had 5% inflation in both food and non-food in 2022? This is a hypothetical question to raise the debate about the implications of higher retail prices. High price inflation is likely to boost retail earnings in the first 12 months. If we have 5% price inflation, the upside to earnings is 6%-12%.