Metcash profit boost sends shares soaring

metcashMetcash shares have hit their highest level in more than three and a half years after the wholesaler managed a 24 per cent lift in first-half profit on the back of boosted earnings across its food, liquor and hardware divisions.

The IGA and Foodland supplier’s food sales dropped 1.4 per cent to $4.36 billion in the six months to October 31, compared to the same period a year ago due to fierce competition from Woolworths and Coles and Aldi’s aggressive expansion in SA and WA. This included a 1.1 per cent fall in key like-for-like sales for IGA, compared to a 0.3 per cent rise a year ago.

Despite this, Metcash’s food division, which also supplies convenience stores, had a 5.8 per cent lift in pre-tax earnings, compared to an 8.1 per cent fall in earnings for the same period last year. Metcash said positive earnings from the convenience business was behind the result, while supermarket earnings were steady due to cost cuts and outsourcing of administration.

Outgoing chief executive Ian Morrice, who will hand the reins to former Tesco executive Jeff Adams on Tuesday, said the group was halfway through its three-year “Working Smarter” cost savings program.

“The savings achieved have been a key factor in supermarkets maintaining its earnings, despite the significant headwinds that include a continuing high level of deflation,” he said.

The group made a net profit of $92.9 million in the half, up 24 per cent on the prior corresponding period. Investors were pleased, driving Metcash shares up 25 cents, or 9.1 per cent, to $3.00 – their highest level since March, 2014. Group sales revenue rose 7.6 per cent to $7.1 billion largely due to a full half-year contribution from the Home Timber & Hardware chain it acquired from Woolworths in October, 2016.

“It really has been a great acquisition that has allowed us to deliver better outcomes for ourselves and for independent hardware retailers and their customers,” Morrice said.

Revenue from hardware, which includes the Mitre10 chain, nearly doubled to $1.06 billion from $581.6 million while liquor sales, which includes Cellarbrations, The Bottle-O and IGA Liquor networks, rose 5.1 per cent to $1.64 billion.

Citi analysts said Metcash’s easing decline in food wholesale sales, the $20 million of cost savings and considerable reduction in debt in the half were positives but noted Aldi will continue to hurt sales in SA and WA.

“‘Working Smarter’ benefits are likely to offset earnings weakness, with the company still targeting about $120 million in annual savings by FY19,” Citi said.

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