Metcash surprise

The release of MTS’ first half FY14 numbers makes for an interesting read. 

Net profit hit $119 million versus a consensus figure of $112 million which was solid, however it is a 1.9% fall on last year and on a like-for-like basis is down 1.4%. First half sales were up 5% year-on-year to $6.57 billion however EBITDA declined 6% to $193.3 million.

The figures paint a very mixed picture and are made even more confusing by the sector break downs.

MTS is facing incessant challenges in its key Food and Grocery (F&G) division as deflation bites. On a like for like basis F&G fell 1.3% as fruit and vegetable deflation hit 13.9%. This is a concern considering F&G makes up 77% of group earnings and the company itself believes this is likely to remain in the near term.

However the moves in liquor, hardware and automotive divisions look to have offset the decline in F&G. The reasoning can be equated to taking full ownership of Mitre 10, the 75% takeover of Automotive Brands Group and the complete takeover of ATAP. The auto divisions were designed to add a third pillar to the earnings stream as MTS looked to offset possible issues in F&G. Plus liquor saw a massive 18.8% increase in sales and a is expected to increase further over the summer months.

However this alone does not explain the net profit numbers. From what I can see the main reasoning for the better-than-expected net profit comes from a lower tax rate of 28% and interest expenses well below that of the forward guidance. This has certainly skewed the NPAT number and will give the MTS results a very clean look even though structurally there are concerns.

The Trade

The reaction to the numbers has been positive, with MTS jumping 6% in early trade as the 70% payout ratio is lapped up by investors having seen the stock decline 11% since the October high and 29% from the April high.

Technically MTS has broken the down trend from October and looks like heading to the 23.6% retracement of the April high to November low of $3.33. This also happens to be the top Bollinger band which is two standard deviations from the 20 day moving average.

If the reaction to the first half numbers holds I would expect this move will occur. If it breaks above the 23.6% retracement the next level is likely to be $3.50.

However if the Christmas period is soft and food deflation continues $3.33 is likely to be resistance and MTS is likely to slide lower. 

Therefore on a short term trade idea, follow the momentum to the top band and have a limit at the retracement level of $3.33 with a stop at just above the November low at $3.10 and buy at market. This is a short term call and should be treated as such. 

Metcash Ltd

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