Why the Metcash Limited share price soared 8% today

Credit: Scott Lewis

Shares of Metcash Limited (ASX: MTS) defied a somewhat uninspiring performance from the broader market today. Its shares soared almost 8% to a high of $2.13, compared to a 0.4% decline for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), after Metcash released its earnings results for the first half of financial year 2016 this morning.

For the six months, Metcash reported a 0.3% lift in group sales to $6.63 billion, boosted by the inclusion of three-weeks’ worth of sales from the Home Timber & Hardware business it acquired from rival Woolworths Limited (ASX: WOW). Group earnings before interest and tax (EBIT) declined 4.2% to $128.1 million, while its underlying profit after tax slipped 4.7% to $82.8 million.

The decline in earnings came from its Food & Grocery division, which was unable to offset continued earnings growth from the Liquor and Hardware pillars. It did, however, note continued positive momentum in the Food & Grocery segment from strategic initiatives, which investors may take some comfort from. Comparable sales in those stores grew 0.3%, representing the fifth consecutive reporting period of sales growth.

Given the group’s struggle against Woolworths, Aldi, and Coles owned by Wesfarmers Ltd (ASX: WES), Metcash is in the process of selling non-core assets and reducing debt. It sold its automotive business to Bapcor Ltd (ASX: BAP) in 2015 and generated another $27.2 million in cash during the latest half, while it managed to reduce its net debt to $197.6 million from $275.5 million as at 30 June 2016.

What’s more, Metcash’s CEO Ian Morrice said he expects supermarket earnings to improve in the second-half in part thanks to an additional trading week. Working Smarter cost savings will also be a contributing factor.

As it stands, dividends are expected to be reintroduced next financial year (the 12 months beginning in July 2017), which again implies the directors’ confidence that Metcash is moving in the right direction.

Foolish takeaway

Although there are signs that suggest Metcash is making progress in its plans to strengthen the core business, it is still facing strong headwinds that represent a threat to shareholders. Indeed, is expected to expand its operations into Australia in the near future which could really dent Metcash’s sales. Although shareholders have done well with Metcash over the past 12 months or so, I’d be inclined to stick to the sidelines.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Motley Fool contributor Ryan Newman owns shares of and Bapcor. The Motley Fool Australia owns shares of Bapcor. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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