Metcash down 12pc in two days as investors flee struggling chain

The Age
Shareholders have fled grocery and hardware wholesalers Metcash after the company revealed major investment would be needed to battle the structural headwinds battering its business.
Shareholders have fled grocery and hardware wholesalers Metcash after the company revealed major investment would be needed to battle the structural headwinds battering its business.
Metcash’s shares had fallen 8 per cent by 1.30 pm on Tuesday, bringing its total decline over the past two days to 12.6 per cent – from $2.77 to $2.42. It is the lowest Metcash has traded since July 2017.
The company, which supplies IGAs and other independent supermarkets, on Monday revealed a 3 per cent rise in its half-year profit but flagged a tougher outlook, with about $8 million in investment needed in the second half to combat the “challenging market conditions” in groceries.
Sales at IGA stores fell 0.2 per cent on a like-for-like basis in the six months to October 31 – an improvement from a 1.1 per cent decline in the same period last year, assisted by lower food deflation.
Metcash said it would outline a new strategy to grow its business in March.
Citi analyst Bryan Raymond said the result revealed weak organic growth under the positive headline numbers, and that many of the tailwinds Metcash had been enjoying – an efficiency program and synergies from buying the Home Timber and Hardware chain – would cease after this year.
“Metcash faces competitive and cyclical challenges as it seeks to pivot from a cost-out strategy to a growth strategy,” he said.
“Without the earnings buffer… the pressure to deliver positive sales growth and organic earnings growth is increasing”.
Metcash said it would reveal a new strategy to revive growth in March next year, which Mr Raymond estimated would need to cost between $50 million to $100 million for it to offset earnings declines. If launched before June, it would “eliminate any potential capital return in the near term”, he said.
Citi downgraded its profit forecast by 4 to 7 per cent over the next three years and cut its price target from $2.55 to $2.45, with a sell rating.
Earnings from Metcash’s hardware unit were up 34 per cent, supporting its overall profit growth, but Credit Suisse’s Grant Saligari said this business – which supplies Mitre and Home Timber & Hardware – was at risk of the softening housing market.
“The structural challenge remains stabilising the sales trend in supermarket distribution… and, near term, an imminent cyclical downturn in hardware,” he said, forecasting no sales growth in hardware next year.
“Large scale cost reduction probably requires significant systems capital expenditure.”
Mr Saligari’s downgraded Metcash’s earnings for the second half price, but his price target moved from $2.51 to $2.60, supported by the assumption that Metcash would be further reducing its costs.
Maquarie meanwhile downgraded Metcash from neutral to underperform, flagging that it needed to invest more in its business to offset structural threats.
“The concern will be that more spend will be required,” Maquarie said in a note to clients.