Metcash Limited (ASX: MTS) just reported its FY21 interim result, could Metcash shares be a value opportunity?
Metcash is a business that has a large retail footprint of 1,623 supermarkets, around 2,700 liquor stores and 653 hardware stores. It supplies independently-owned IGA and Foodland stores. It supplies independent liquor brands like Cellarbrations, IGA Liquor and The Bottle-O. The hardware brands are Mitre 10 and Home Timber & Hardware.
HY21 result
Metcash reported that it delivered significant growth in sales volumes across each of its pillars.
Group revenue increased by 12.2% to $7.1 billion. Total food sales went up 9.5%, or 16.3% excluding the impact of losing Drakes and 7-Eleven. Total liquor sales went up by 14.3% to $2 billion. Hardware sales went up 20.6% to $1.3 billion with significant growth of higher margin DIY sales. However, excluding acquisitions hardware sales only increased by 16.2%.
Underlying EBIT (EBIT explained) grew by 30.4% to $203 million whilst underlying net profit after tax (NPAT) went up by 43% to $129.6 million. The company reported a statutory net profit after tax of $125.1 million, which was a large improvement of the $151.6 million loss a year ago.
Operating cash flow increased significantly, up to $314.9 million (up from $88.8 million in the prior corresponding period).
In terms of COVID-19 costs, Metcash reported that these costs amounted to $8 million in the first half of FY21.
Balance sheet and dividend
At the end of 31 October 2020, it had net cash of $172.5 million, up from $86.7 million in FY20.
The Metcash board decided to pay a fully franked interim dividend of 8 cents per share, which was an increase of 33.3% compared to last year.
That means that Metcash now has a fully franked dividend yield of 4.5% at the current pre-open Metcash share price.
Management comments
Metcash CEO Jeff Adams said: “All pillars reported an improvement in their earnings and margins, reflecting the positive operating leverage generated from higher sales despite investing in COVID-19 safe work practices.
“The acquisition of a majority stake in Total Tools Holdings in the half, is in line with our strategy for the Hardware pillar, and provides us with significant growth opportunities. It also broadens our footprint in the hardware sector and diversifies the group’s earnings base.”
Outlook
Metcash said that sales have continued strongly in the first five weeks of the second half of FY21.
Food sales are up 2.4% (or 12.1% excluding the 7-Eleven impact). Supermarket sales were up 12.1%.
Liquor sales were up 16.9% and hardware sales were up 25.3%, or 19.3% excluding Total Tools.
This seemed like a solid result for Metcash. I think it could be an unloved opportunity and may be worth buying. Its businesses aren’t quite as good as the national leaders in DIY stores or supermarkets, but it is generating good growth. Using CommSec numbers, it is valued at 15 times the estimated earnings for the 2021 financial year.
However, I do think I’d prefer to buy other ASX dividend shares for the long term such as Brickworks Limited (ASX: BKW).
