Metcash reported a largely flat sales and EBIT result in 1H25. The stable result masks significant movement under the surface, with a good Food segment result, but weaker organic earnings in Liquor and Hardware. The path of Hardware EBIT margins will be the central debate on Metcash over the next 12 months. We estimate Hardware corporate store earnings fell 45% in 1H25, driven by a decline in sales. If Hardware is truly cyclical, then a meaningful recovery is likely. We take a more cautious stance.

Metcash provided a trading update indicating 1H25e underlying NPAT will be between $132-$135 million. The key driver has been the decline in sales and negative operating leverage in Metcash’s IHG hardware stores. Tough conditions are likely to prevail in 2H25e as well, albeit we are at a low point in the building cycle, providing scope for margin recovery at some point.

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.