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Metcash Limited’s (ASX:MTS) shares are climbing on a $125 million off-market buyback

Grocery wholesaler Metcash Limited (ASX: MTS) has announced its full year results today, with a statutory loss after tax of $149.5 million coming as no surprise after Drakes Supermarkets in South Australia withdrew their support back in May.

But with its share price up 5.2% to $2.93 in early morning trade, we can only assume investors have responded well to the announcement of a $125 million off-market buyback.

The buyback – at a price discount between 8% and 14% – comprises a fixed capital component of 61c and the remainder a fully-franked dividend.

This will be attractive to those investors who can obtain the full benefit of the franking credits – such as those with SMSFs.

Metcash shares tumbled lower throughout late May and early June – dropping from a high of $3.68 on May 25 to a low of $2.65 on June 7 after announcing its FY18 results would recognise a $352 million impairment to goodwill and other net assets in its supermarkets and convenience segment.

Today, underlying profit after tax came in as expected – up 10.7% to $215.6 million – but its statutory loss included goodwill and net asset impairment of $345.5 million.

Despite the hiccup, Metcash logged strong operating cash flows and a rise of 4.3% in group sales to $14.5 billion with group EBIT up 9.2% to $332.7 million – driven predominantly by growth in hardware earnings – with FY18 reflecting a full year of HT&H contribution as opposed to  seven months in FY17.

Taking a closer look at the specifics, its supermarkets segment did struggle overall, with total sales down 1.4% to $7.41 billion as competition ramped up across all states with pressure rising in Western Australia in particular.

Wholesale sales, excluding tobacco, decreased by 3.6%, with Queensland negatively impacted by deregulation of trading hours, the Commonwealth Games and adverse weather in the second half.

Sales in Metash’s convenience segment also suffered, down 0.5% overall to $1.49 billion, but the sweetener was an increase in second-half sales driven by higher sales to a large customer and two substantial customer contracts extended beyond FY19.

Metcash’s liquor segment performed well, with sales up by 5.7% to $3.47 billion with new customers coming on board and existing customers upping their volumes.

Metcash’s hardware sales segment results held its own, with total sales up from $520.1 million to $2.1 billion off the back of solid construction activity in the overall market and strong growth from Mitre 10 – with wholesale sales up 8.6%.

Metcash’s hardware EBIT jumped by $20.5 million for the year to $69 million and the company will target eight new trade-focused stores in FY19.

Looking forward, Metcash has plans to improve infrastructure to enable change with plans to grow its grocery business and reduce costs to address the loss of sales to Drakes in South Australia.

The supermarket space is a highly competitive sector, dominated by Woolworths Group Ltd (ASX: WOW) and Wesfarmers Ltd (ASX: WES), with the likes of German chain store Aldi keeping all players on their toes with discounted products.

But the most difficult times could be yet to come, with German superstore Kaufland heading Down Under.

Kaufland has two stores planned for opening in 2019 so far – one in Adelaide and the other in Dandenong, Victoria – with Kaufland’s parent company Schwarz Group a force to be reckoned with in the space as the owner of discount chain store Lidl.

Metcash’s FY18 financials are in brief below:

  • Statutory loss after tax of $149.5 million
  • Impairments of $345.5 million (post tax)
  • Group EBIT up 9.2% to $332.7 million
  • Underlying profit after tax up 10.7% to $215.6 million
  • $125 million off-market buy-back announced
  • 7c per share fully-franked final dividend

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Motley Fool contributor Carin Pickworth 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.

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