MoneyTalks: Broker highlights Metcash’s potential, boosted by food, liquor, and housing recovery

Jarden Research sets Metcash target price at $4.40
The company has seen strong performance in Food and Liquor sectors
Long-term prospects are positive, says Jarden, driven by recovery in the housing market

Jarden Research has recently provided an in-depth analysis of Metcash (ASX: MTS), explaining why the company is an attractive investment despite facing a mixed trading environment.

Jarden has slapped a target price of $4.40 on MTS, versus current price of $3.69.

Metcash is a $4 billion market-capped, leading Australian wholesale distribution company, primarily involved in the grocery, liquor, and hardware sectors.

For FY24, Metcash reported a slight decline in underlying EBIT, down by approximately 1% year-over-year. While this decrease may seem modest, it was 2% better than market expectations.

Jarden believes the company’s resilience is evident in its strong cash flow performance, with a solid conversion rate of 101.8%. The conversion rate is a liquidity ratio that measures a company’s ability to convert its operating profits into free cash flow.

Jarden says these factors highlight Metcash’s ability to maintain financial stability despite a challenging backdrop.

Hardware sales, meanwhile, experienced a significant slowdown in Q4, attributed to a softer market. This led to a decline in EBIT margins for the latter half of the year, with a particularly weak performance in Q4.

Despite these hurdles, Metcash’s performance in other sectors, notably Food and Liquor, has been more encouraging.

“The market continues to value MTS as a structurally challenged food wholesaler, which we expect to change as earnings from food continue to grow…” said the note from Jarden.

Growth drivers: food and liquor

Jarden says Metcash has shown promising signs as we look to FY25, especially in its Food and Liquor divisions.

Food sales grew by 3.6% year-over-year, excluding tobacco, and Liquor sales increased by 3.1% in the first seven weeks of the fiscal year.

This strong performance contrasts with the weaker results in other areas, such as its hardware-focused IHG and Total Tools brands, which saw declines of 4.9% and 3.3%, respectively.

Jarden says that Metcash’s Food segment is trading at a substantial discount relative to industry peers. This undervaluation is particularly notable given the segment’s potential for growth.

Jarden believes the company’s focus going forward should be on improving its products and boosting its own brand food items, which will help it grow further in this sector.

“The key moving forward is also in accelerating own brand, clear pricing and investment in online and loyalty to compete with Coles and Wooloworths,” says Jarden.

Strategic outlook

Jarden remains optimistic about Metcash’s long-term prospects.

Despite the near-term challenges, including a weaker housing market impacting the hardware division, the research firm sees significant upside potential.

The anticipated recovery in the housing market is expected to benefit Metcash’s hardware/tools business, potentially boosting its performance in 2025 and beyond.

The company’s commitment to ongoing cost reductions, with a target of $15 million in savings for FY25, combined with improved teamwork and higher customer satisfaction scores, positions it well for future success.

Jarden Research has now revised its target price for Metcash to $4.40, up from $4.20, reflecting a positive outlook on the company’s future earnings potential.

“We retain our Overweight rating with the view valuation is attractive, the food market is improving and the market will begin to price in a housing upcycle 3 to 6 momths in advance,” says Jarden.