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.

Australian supermarket volumes are likely to drop by 2% in FY24e on a per capita basis, which is a continuation of declines seen since March 2022. While higher food prices may explain some of the softness in volumes, other factors are at play including channel leakage, lack of store refurbishments and less new product innovation. We forecast 3.0% comparable sales growth for the supermarket sector in FY25e, but a downside case of 2.3% is possible if volumes continue to decline. A low rate of comp sales growth would be very challenging given comp cost growth is unlikely to fade. Weaker comp sales will put downward pressure on Coles and Woolworths profit margins.

The Senate Inquiry into Supermarket Prices has escalated into a debate about the merits of return on equity (ROE) as a measure of profitability. We certainly prefer ROE and other returns measures over percentage profit margins. However, in the case of Woolworths, the ROE of 27% (pre sig items) is influenced by historical cost accounting, buybacks and demergers. Care needs to be taken in looking at a single year.

Metcash’s investor day made it clear that it is looking to accelerate growth. This growth will increasingly come from store openings and Metcash will need to spend more capex to facilitate the growth. The company is in a stronger position to grow given the profitability across the network and capability of management.

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 reported a soft 1H24 result with sales up 1.3% and EBIT down 3.4%. The drop in EBIT was concentrated in the Hardware division and further margin pressure is likely given soft demand and rising operating costs. The Food segment has once again confounded sceptics by growing sales (ex tobacco) close to market growth and liquor is performing well. Metcash’s significant capex and acquisition outlays along with rising rates will lift finance costs over the next 18 months.

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.

Metcash reported FY23 EBIT up 8% and 2H23 EBIT up 5%. While there has been some concern about a drop in demand, Metcash has demonstrated good sales trends relative to industry growth in all its segments. The company may not buck broader industry trends going forward, but its valuation provides a margin of safety relative to peers.

We expect a strong year of earnings growth for Australian supermarkets in FY23e. Higher food inflation is boosting sales and gross margins are also rising. We lift our FY23e EPS forecast for the major chains. Woolworths has the strongest sales growth, followed by Metcash, then Coles based on our feedback. In the full report, we address the cycle of price inflation and outlook over the next 12 months; and the outlook for Coles and Woolworths gross profit margins and EBIT margins.

Metcash reported FY22 sales of $17.4 billion and EBIT of $472 million. Adjusting for the 53-week in FY22, sales rose 4% and EBIT rose 16%. The results reflects higher price inflation across all divisions and a mix-shift towards the Hardware division, which has higher margins. Metcash has been able to hold onto much of its customer gains made during COVID-19. While we expect a lack of EPS growth over the next two years, the company’s competitive position has improved in each division.