Metcash structurally challenged: UBS
IGA supplier Metcash may struggle to sustain the food and grocery price cuts upon which it is relying to keep up with rival supermarkets.
“We believe Metcash is structurally challenged and is facing significant headwinds, despite measures taken to level the playing field via price match,” a report by UBS analysts said.
“We expect long-term share and margins to fall in grocery, creating earnings and share price pressure, not reflected in the current price.”
The report said Metcash’s turnaround strategy, which includes matching Coles’ and Woolworths’ prices on a core basket of goods, would deliver short-term results but that it may not be an effective long-term strategy.
“The risks around the long-term sustainability of Metcash’s food and grocery business create a high degree of uncertainty,” it said.
Risks include losing the means with which to invest in the business because of tight margins.
Metcash shares lost more than 12 per cent of their value on Monday after the IGA and Foodland supplier released its FY2016 results.
They recovered slightly on Tuesday, rising five cents, or 2.7 per cent, to $1.905 by 1430 AEST.
But investors remain unnerved by a substantial fall in Metcash’s core food and grocery division’s earnings.
The supermarket division’s earnings before interest and tax plunged 17 per cent to offset growth in the group’s two other divisions – hardware and liquor – and to drag Metcash’s overall EBIT down 7.4 per cent to $275.4 million.
The company also flagged increasing costs, deflation and competition, mainly from Aldi’s expansion in South Australia and Western Australia.
UBS analysts said Metcash had the most to lose from Aldi’s expansion given its high 25 to 30 per cent share of SA and WA’s food and grocery industry.
Metcash chief executive Ian Morrice’s base salary rose to $1.8 million from $1.5 million a year ago.
His total remuneration, including super and short-term incentives, was almost $3 million compared to $2.5 million in FY15.