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Metcash (ASX: MTS): An Impressive Turnaround Story
This year, Metcash has become a standout turnaround story in the Australian market, with its shares climbing 18% since June following two significant earnings reports that showcased a promising business recovery. The company, a key player in the grocery, liquor, and hardware sectors across Australia and New Zealand, had faced significant challenges, with its stock sitting at near three-year lows for the majority of 2024. However, strategic changes and early signs of a housing market rebound have piqued investor interest.
Trading Update Boosts Stock Value
The catalyst for this turnaround was a trading update released on 10 June, which revealed:
- Underlying profit guidance of $273-277 million, slightly exceeding the consensus of $272 million.
- Plans to merge its Independent Hardware Group with Total Tools, creating a single hardware division.
This earnings guidance prompted a positive market reaction, with the stock surging 3.5% on the announcement day and an additional 5.5% over the next eight trading sessions. Following this, several brokers revised their price targets; JPMorgan increased theirs to $4.40 from $4.20, while UBS raised their estimate from $3.50 to $4.00.
On 23 June, Metcash released its full-year results that met the upper end of its earlier guidance:
- Revenue rose by 8.9% to $17.3 billion.
- Underlying EBIT increased 2.3% to $507.8 million, aligning with guidance.
- Underlying profit after tax decreased slightly by 2.4% to $275.5 million, but still within the guidance range.
- A final dividend of 9.5 cents per share outperformed UBS’s expectation of 8.9 cents.
Signs of Recovery in Hardware
Historically a weak point due to downturns in the housing market and stiff competition, the hardware division has shown tentative signs of stabilisation. Total hardware sales grew by 1.1%, which can be attributed to previous acquisitions like Alpine Frame & Truss and Bianco Building Supplies.
Further optimism can be drawn from the early FY26 trading update, which covers the first seven weeks of the new financial year. Here, total group sales increased by 4.7%, food sales (excluding tobacco) surged by 17%, and supermarket sales rose by 2.9%.
Post-earnings, UBS maintained a Buy rating, expressing confidence in the multi-year recovery potential of the hardware business. They also raised their target price for Metcash to $4.25 from $4.00.
Stability from Food and Liquor
While the hardware sector is the focal point of recovery, Metcash’s food and liquor divisions have provided crucial stability. The food division has capitalised on new contracts and growing market share, offsetting the declines in tobacco sales which have negatively impacted foot traffic in supermarkets.
The liquor division, through Australian Liquor Marketers, continues to perform steadily despite facing competitive margin pressures. Analysts are particularly enthusiastic about the recent acquisition of Superior Foods, anticipating additional benefits from new contracts across food and liquor segments.
Housing Market Recovery is Crucial
The future prospects for Metcash’s hardware division are closely tied to the recovery of Australia’s housing market. As interest rates are expected to decrease and housing indicators improve, increased construction and home improvement spending could significantly benefit the hardware business.
Goldman Sachs, though retaining a Sell rating and a target price of $3.10, recognised the potential for operational leverage to emerge as housing conditions improve, albeit with uncertain timing.
Metcash’s consolidation of its hardware operations is expected to yield procurement and labour efficiencies in the medium term, strategically positioning the company for recovery when the market picks up.
Conclusion
The recent revaluation of Metcash reflects a company that seemed to be left for dead due to past earnings downgrades and tumultuous macroeconomic conditions over recent years. The stock has shown unexpected resilience throughout 2024, notably reclaiming key moving averages between late April and early May. This technical recovery, coupled with a better-than-expected trading update, activated a notable shift in market sentiment.
Growing momentum from analysts’ price target upgrades, combined with its attractive valuation in comparison to peers such as Woolworths and a favourable dividend outcome, has spurred a powerful rejuvenation narrative, with Metcash shares climbing as much as 22% from the first trading update on 6 June to 7 July. As such, Metcash’s ongoing strategic initiatives and potential market recoveries make it a noteworthy entity to watch in the coming periods.
