Metcash reported FY24 EBIT down 1% and, adjusted for acquisitions, it was a similar result in both the first and second-half. The company is actively managing costs to offset weak sales trends and this thematic is likely to be a feature again in FY25e. Metcash’s performance relative to market growth remains impressive and is the primary reason for our positive stance on the stock.

Metcash’s acquisition of Superior Foods and two mid-sized hardware businesses is sensible and, in our view, best described as fairly priced. The upside in value for Metcash shareholders will come from realisation of synergies by FY26e, with potential value creation as Metcash builds scale in the foodservice and frame & truss sectors.

Metcash’s strategy day outlined more initiatives to drive sales growth and higher capex. The strategy is logical given its market position and more profitable retailers. In our view, revenue growth will be structurally better than historically. In food, the market is more rational both for store growth and pricing, which will mean much better growth than 2010-2019. In Hardware and Liquor, as a clear number two, the company has opportunities to drive new stores and refurbishments. While growth is stronger, capex will be over $200 million a year and in part a necessary investment in supply chain and IT to enable growth.

Metcash will host an investor day on 17 and 18 October 2022. This is the first opportunity for new CEO Doug Jones to set his agenda for the company. We expect the focus to be about initiatives that drive sales, more so than margins. Updating the company’s IT and distribution centres is likely to be a near-term focus. We will look for information about initiatives to drive more store refurbishments as well. We are interested in longer-term challenges such as developing a better value offer and private labels; considering expansion into food service or pharmacy and how the business will compete online. The strategy may not move numbers much, other than higher capex in our view.

Metcash reported 1H22 EBIT up 14%. The growth was driven by a full-period contribution from Total Tools in Hardware. Total Tools still has a runway for further growth given imminent store acquisitions. The company has also fundamentally stabilised its market share in Supermarkets. Metcash has a much better business mix and industry structure than historically and as a result the shares should trade at a higher multiple.

Metcash has stabilised its food market share over the past two years and Hardware sales and earnings are likely to grow meaningfully. Metcash is perceived as a COVID-19 beneficiary and therefore has struggled to re-rate in recent months. However, our analysis suggests that its market share in Supermarkets is likely stabilised for more fundamental reasons. Competitors are opening fewer stores, IGAs are no longer shutting stores and the risk of contract losses is now in the rear vision mirror. In the hardware industry, Metcash is likely to gain share given its 60% skew to trade and continued rollout of Total Tools stores.