The Metcash Limited (ASX: MTS) share price dropped lower today despite gaining an upgrade from broker Morgan Stanley.
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The Metcash Limited (ASX: MTS) share price dropped lower today despite an upgrade by analysts at Morgan Stanley. In the latest broker report, Morgan Stanley increased the price target on Metcash from $3.80 to $4.15.
The Metcash share price closed today at $3.46, down 2.5% for the day.
Why the broker upgrade?
According to Morgan Stanley, Metcash’s second half trading to date showed “ongoing tailwinds with its food and liquor division, and increased upside with its hardware pillar”.
The broker said the strong sales was complemented by operating leverage, with hardware sales 5% ahead of expectations, complemented by a 1.40% margin expansion. This reflected a higher contribution from the company’s DIY hardware segments from both company-owned and joint-venture stores.
Morgan Stanley equity analyst, Niraj Shah, noted Metcash’s strong start to the second-half, and believes that the company’s share price is trading at a significant discount to most of its peers.
“Despite persistent category and company specific tailwinds, further diversification and an improved balance sheet means that Metcash trades at a 40% discount to the ASX 200 Industrials ex-Financials index. This compares with its long-term historical average discount of 35%.”
The broker maintained its overweight rating on Metcash’s shares, and lifted its price target from $3.80 to $4.15.
A brief take on Metcash
Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer.
The company effectively acts as a co-operative for the small corner shop and the local independent supermarket. By funnelling sales volume through a single channel, Metcash derives buying power to negotiate volume discounts with manufacturers.
In addition, the company owns national retailers such as Mitre 10, Home Timber & Hardware, and Cellarbrations, as well as the IGA supermarket chain. Note that Metcash owns the IGA brand, but the individual IGA stores are owned independently.
Metcash is often called the “4th force” in the supermarket and liquor industry, with 11% market share from its IGA stores competing with Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL) which account for 65%, and Aldi at 9%.
For the six months ended 31 October, the company reported a 12.2% increase in group revenue to $7.1 billion. This led to Metcash reporting a 30.4% increase in underlying group earnings before interest and tax (EBIT) to $203 million, and a 43% lift in underlying profit after tax to $129.6 million.
About the Metcash share price
The Metcash share price has gained 35% in 2020, after dropping by 10% in May. At the current share price, the company has a market value of $3.6 billion.
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Motley Fool contributor Eddy Sunarto has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.