Metcash/MTS

Headlines

A solid operational result for MTS.

Revenues

Sales in food and liquor grinding higher, noting that the hardware segment looks particularly strong, but was driven by inorganic M&A. Once you account for that, hardware sales were not strong at all.

In many ways, everything is a play on housing. Here the hardware segments are against a backdrop in which new home sales (housing starts) are cyclically very weak, even as DIY (do it yourself) and trade held up relatively well.

The store roll-out strategy continues…

Operating income

Operating income trending higher…

Cashflows

Cashflows were the highlight of the result. Food and liquor are typically highly cash-generative defensive asset/income streams, which is also why we like Coles (COL).

That cash conversion ratio stood at 92% for the half.

Volume growth

The comments on a return to volume growth are interesting, firstly, because there is an effort to drag the supermarket chains into hearings regarding price gouging, and secondly because we do own some of the packaging companies like Amcor that are dependant on volume growth.

Conclusion

The hardware segment is the growth arm for Metcash, even as it is the one facing pressures from a macroeconomic slowdown.

That’s why MTS trades at 12x forward earnings, as opposed to something like 20x for a COL (which doesn’t have hardware) or higher still for a WOW.

We think that risk from a housing/trade-related slowdown is a) largely (or at least partially!) in the price b) we are very underweight housing in the rest of the portfolio.

It is also the case that population growth is part of the thesis, which is behind our supermarket exposures (people gotta eat) and the need to build more housing.

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