Independents Day | (ASX:MTS) Share Recommendation

Ord Minnett Research Recommendation:  Metcash

(ASX: MTS)  

Metcash provided a trading update at its AGM. Sales momentum has continued over the past 10 weeks (late June, July and August), despite cycling Delta lockdowns from the same period in 2021. This reflects three key themes for Metcash: 1) customer retention in independent supermarkets post lockdown; 2) effective passing-on of inflation pressures; and 3) the benefit of online volumes flowing back into stores.

Supermarkets – Independent supermarkets are proving resilient, with sales over the past 10 weeks rising 2.6%, 70 basis points (bp) below our estimate of 3.3% supermarket industry sales growth over the same period, although well ahead of Woolworths (WOW, Lighten) which declined 0.5% over the past eight weeks. This is despite a 160bp tobacco headwind and cycling lockdowns, and the local shopping tailwind. Wholesale inflation is running at 4.9% this quarter, implying volume/mix declines, albeit less pronounced than Woolworths, as shoppers fractionalise their baskets and online volume won by Woolworths and Coles (COL, Lighten) comes back into stores. With independents slightly below market growth and Woolworths significantly below on a year-on-year basis, this implies Coles and Aldi are likely regaining market share off a low base.

Hardware – Mitre 10 is well placed, seeing sales growth accelerate from 10.4% over the first seven weeks of the fiscal year to 12.6% over the past 10 weeks, as Mitre 10 benefits from very high inflation and strong demand in the trade channel. Total Tools continues to deliver outstanding sales growth (85%), benefitting from store roll-out, inflation and strong trade demand. This growth in Total Tools is driving overall hardware growth of 19.5%. We expect hardware sales growth to moderate to 16.6% in the first half as conditions gradually normalise.

Liquor – Liquor sales growth accelerated from 8.6% in the first seven weeks of the half to 13.5% over the next 10 weeks, as the most recent 10-week period reflects the cycling of on-premises restrictions and closures during the Delta lockdown period in 2021. This is reflected in the 35% growth in on-premises wholesale sales over the first 17 weeks.

This trading update was supportive of our positive view and we have increased our EPS estimates by 1–2% over FY23–25. We maintain our Buy recommendation and have raised our target price to $5.00 from $4.80. Metcash is our clear preference over Woolworths and Coles.