Metcash interim net profit rises 24 pc on gains from Mitre 10-Home Timber merger

Sue Mitchell
December 4, 2017
AFR

Metcash’s interim net profit rose 24 per cent to $92.9 million from the year-earlier $74.9 million as strong gains from the merger of Mitre 10 and Home Timber & Hardware offset subdued earnings growth from food and liquor wholesaling.

Metcash managed to deliver earnings growth from all three business pillars and slash debt levels despite intense competition between Woolworths, Coles and Aldi, record price deflation and subdued consumer confidence.

Excluding one-off costs, underlying net profit of $99 million, up almost 20 per cent, exceeded market forecasts around $87 million, sending Metcash shares up 6.5 per cent in early trade on Monday to a high of $2.93.

“Overall the results are pleasing despite the continuation of some of the most difficult and challenging market conditions we’ve seen,” said outgoing group chief executive Ian Morrice, who hands the reins to Jeff Adams on Tuesday after five years at the helm.

Food and grocery, Metcash’s biggest division, returned to profit growth in the six months ended October 31, with earnings up 5.8 per cent to $89.4 million despite a 1.4 per cent fall in sales to $4.4 billion.

Supermarket profits were flat despite cost savings from the $120 million three-year Working Smarter efficiency program, while the convenience business returned to profit after losing $4.3 million in the year-ago period.

Supermarket sales slipped another 0.8 per cent and wholesale sales ex-tobacco –  a key metric for analysts and investors –  fell 3.7 per cent as independent retailers lost market share to a resurgent Woolworths and Aldi, which is pushing into independent heartland in South Australia and Western Australia. This was a slight improvement after a 4.4 per cent decline in the April-half 2017.

Same-store sales at IGA stores declined 1.1 per cent but Mr Morrice said the trajectory was improving and second quarter sales were stronger than those in the first quarter.

Metcash and independent retailers invested heavily into price, with more frequent, deeper promotions to match prices at the major chains. As a result,  food and grocery prices fell a record 2.7 per cent, compared with 2 per cent in 2017, with double-digit deflation in produce.

In hardware, earnings soared 117 per cent to $27.1 million as Metcash booked a full six months of sales and synergy benefits from Home Timber & Hardware, which was bought from Woolworths on October 2, 2016 for $180 million. Sales jumped 83 per cent to $1.06 billion.

In liquor, earnings were crunched by bad debt provisions in Western Australia and the costs of preparing for the launch of the container deposit scheme in NSW on December 1. EBIT rose just 1.8 per cent to $27.6 million despite a 5.1 per cent rise in sales to $1.64 billion.

Metcash declared its first interim dividend since 2014, paying out a fully franked 6¢ a share on January 19, after reducing net debt by $94 million – $630 million over almost three years – ending the period with net cash of $14 million.

Mr Morrice said the strong balance sheet would enable the company to continue to invest in its core businesses and independent retailer networks while maintaining strategic flexibility for the future and explore capital management. 

He issued no detailed guidance for the full year but said challenging market conditions were expected to continue.

Metcash expects positive sales momentum to continue in hardware in the second half and upgraded its target for synergy benefits, which are now expected to reach $20 million to $25 million, compared with previous guidance of $15 million to $20 million.

In food and grocery, Working Smarter cost savings are expected to help mitigate the impact of difficult market conditions, while modest growth is expected in liquor, with the container deposit scheme could disrupt sales.

Deutsche Bank analyst Michael Simotas is forecasting an underlying net profit of $207 million for the full year,  while consensus is currently around $210 million.

“Clearly the challenges in food remain but it seems to have stabilised and cost out is delivering benefits,” Mr Simotas said. “Liquor and Hardware provide potential upside, particularly given the upgraded synergy target.”