Metcash share price: what's the outlook following FY20 results?

We examine the highlights from Metcash's recently released full-year results.

Metcash share price rises on FY20 results

Australian food, liquor and hardware conglomerate Metcash (MTS) handed down its full-year FY20 results to the market on Monday, 22 June.

The response from investors was an optimistic one, with the Metcash share price being bid 1.06% higher, to finish the session at $2.86 per share. Metcash opened higher on Tuesday, last trading at $2.90 per share.

Overall, Metcash saw group revenue come in at $14.9 billion (+2%), while earnings (Group Underlying EBIT) came in at $324.2 million – on a pre AASB 16 basis.

On the bottom-line, the conglomerate delivered an underlying profit after tax of $209.7 million, on a pre AASB 16 basis. This result was broadly in line with the conglomerate's FY19 NPAT, and was ‘was driven by a weaker-than-expected Food EBIT margin,’ according to Citi analysts.

For income-minded investors, Metcash announced it would be paying a final dividend of 6.5 cents per share – bringing the company's full-year dividends to 12.5 cents per share. The FY20 final dividend is set to be paid on 5 August.

Finally, In a separate announcement, Metcash also announced that it has entered into the final stage of negotiations to acquire a 70% stake in Total Tools for $57 million.

The FY21 outlook

Looking at the early parts of the new fiscal year, Metcash’s management said that food sales have continued to exhibit robust growth – as a result of changing consumer behaviours – up 9.3% in the first seven weeks of FY21.

'The business is continuing to progress its growth initiatives focused on further improving the competitiveness of its retailer network and has a strong focus on costs to help offset the impact of inflation and other cost pressures,’ the company said.

Overall, Metcash's other two key business pillars: liquor and hardware have also benefitted from a change in consumer behaviour, with sales up 5.5% and 9.5% in the first seven weeks of FY21, respectively.

In saying that, the conglomerate noted that due to uncertainties regarding the easing (or potentially further strengthening) of Covid-related restrictions, it remains difficult for Metcash to quantify how much longer it will 'continue to benefit from the favourable change in consumer behaviour' in FY21.

Moreover, the Group’s Chief Executive noted:

'Going forward, we are well positioned with a strong balance sheet to help manage through the current uncertain environment while continuing to invest in Growth opportunities.’

The analyst view

Looking at some of the key analyst takes in response to yesterday’s FY20 results, we see that:

  • Citi argued that 'Metcash remains the clear market share winner in grocery', but noted that operating leverage has diminished, as costs rise in step with sales growth. Citi has a Neutral rating and a $3.10 price target on MTS.
  • J.P. Morgan remains Overweight the stock, with a price target of $3.15 on Metcash. While the FY20 results came in below the investment bank's forecasts, J.P. analysts argued that there is valuation support, upside potential for MTS's food segment and that the Total Tools acquisition ‘provides an incremental growth option.'
  • Elsewhere, UBS analysts retained their Buy rating and increased their price target on Metcash to $3.05 per share. While the investment bank’s analysts said the results were ‘softer than expected’, the conglomerate remains attractive from a valuation perspective.

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