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Is the Metcash Limited (ASX:MTS) share price cheap or a value trap?

This morning IGA supplier, liquor, and hardware business Metcash Limited (ASX: MTS) reported its half-year result for the period ended October 31 2018. Below is a summary of the result with comparisons to prior corresponding periods.

  • Revenue up 2.2% to $6.2 billion
  • Underlying profit after tax up 1.2% to $100.3 million
  • Statutory profit up 3% to $95.8 million
  • Food EBIT up 2.4% to $93 million
  • Supermarkets sales flat at $3.6 billion
  • Hardware EBIT up 34% to $37.8 million
  • Liquor EBIT down 1% to $29.1 million
  • Group announced a $150 million share buyback in August 2018
  • Net debt of $85.2 million as at October 31, 2018
  • Interim dividend of 6.5 cents per share, fully franked

The stock has fallen 3% to $2.69 in early trade on a day when the S&P / ASX200 (ASX: XJO) is up around 1.6% after news broke of a de-escalation in the trade dispute between China and the US.

This is a reasonable result for a Metcash business that is still something of a turnaround story as the group’s IGA stores in particular have struggled due to the recent decision of Woolworths Group Ltd (ASX: WOW) to cut its grocery margins in response to competition from Coles Group Ltd (ASX: COL) and overseas competitors like Aldi.

In its outlook statement the group also warned that in the food business “highly competitive market conditions are expected to continue through the balance of FY19”. It also described supermarkets conditions as “challenged” with food price deflation a problem in particular in Western Australia according to the group.

Unfortunately for Metcash investors the foods business still represents the lion’s share of earnings, although its hardware business is performing well under the Mitre 10 and Home Timber and Hardware brands, with same-store sales up 3.3%, and EBIT up an impressive 34% to $37. 8 million. T

he group’s liquor business also put in a decent performance thanks to strong wholesales sales in particular.

Foolish takeaway

The group offers a 5% yield based on 13.5 cents in dividends over the past year and trades for just 12.5 trailing earnings. The relatively cheap looking valuation reflecting the significant competitive risks its IGA businesses are facing.

Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET. 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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