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Metcash Limited (ASX:MTS) shares lower on $352 million asset impairment

In morning trade the Metcash Limited (ASX: MTS) share price has tumbled lower once again.

At the time of writing the embattled wholesale distributor’s shares are down 3.5% to $2.66.

Why are Metcash’s shares tumbling lower again?

This morning Metcash advised that its financial statements for FY 2018 would recognise a $352 million impairment to goodwill and other net assets in its Supermarkets and Convenience segment. This will wipe out its expected underlying profit of approximately $216 million.

According to the release, management has taken action following the company’s end of year review of the carrying value of its assets.

The review took into account the recent news relating to the potential loss of Drakes South Australia as a customer, weakness in the Western Australian economy, and the ongoing competitive pressures in the sector.

Management has explained that the impairment charge comprises $318 million of goodwill and other intangibles, with the remaining $34 million related to net assets in the Supermarkets and Convenience segment.

It was, however, quick to point out that the impairments are non-cash in nature and therefore have no impact on the its debt facilities or compliance with banking covenants. Metcash’s full-year results will be released on June 25.

Should you buy the dip?

All in all, I don’t think this impairment changes things too much. However, I wouldn’t be in a rush to invest in Metcash.

The loss of Drakes South Australia will create a reasonably large earnings gap estimated at around $18 million that could be hard to fill. Then there is the danger of Drakes Queensland following the lead of its South Australian equivalent and going it alone as well.

I think the prospect of losing two major clients at a time when the food retail market is suffering from increased competition from Wesfarmers Ltd (ASX: WES), Woolworths Group Ltd (ASX: WOW), and international players is a disaster for the company and could weigh heavily on its shares for the foreseeable future. Because of this, I would suggest investors give Metcash’s shares a wide berth for the time being.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. 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 Scott Phillips.