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What top brokers are saying about the Metcash Limited (ASX:MTS) share price crash

The Metcash Limited (ASX: MTS) share price tumbled for a second day following the release of the grocery distributor’s first half profit results.

The Metcash share price slumped 7.8% to a more than 52-week low of $2.43 in after lunch trade – making it the worst performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.

In contrast, the Emeco Holdings Limited (ASX: EHL) share price and Syrah Resources Ltd (ASX: SYR) share price are the second and third worst performers on the index with losses around 6% each at the time of writing.

Is Metcash a Cheap ASX Stock?

Metcash’s fall comes on top of the MTS’ 5% share price wipe-out yesterday when management unveiled a lower than expected 2.2% increase in interim sales to $6.2 billion and 1.2% improvement to group earnings before interest and tax (EBIT) to $158.1 million.

If you are wondering whether Metcash’s shares are looking cheap after the big fall, the answer is probably “no” if you listened to what the top brokers are saying post-results.

Citigroup has reiterated its “sell” rating on the stock as the broker pointed out that the stock needed to be rebased before it can return to growth. In simple language, the stock needs to fall more to find support.

“Metcash’s 1H19 result continued to demonstrate weak organic growth in food despite positive headline numbers,” said the broker.

“Improved momentum in wholesale Food sales ex tobacco was primarily driven by inflation, while the settlement of onerous leases drove EBIT growth. Hardware was a highlight, but the timing of synergies underpinned an earnings beat, with growth to slow markedly in 2H19e.”

Citigroup downgraded its profit forecasts on the stock, which led to a 10 cents cut in the broker’s price target on Metcash to $2.45 a share.

Broker Recommendation Changes

Macquarie Group Ltd (ASX: MQG) was also unimpressed by the results and downgraded the stock to “underperform” from “neutral” as it warned that Metcash is running out of growth levers to pull.

The broker noted that Metcash was targeting to save $24 million in FY19 from its cost cutting drive and this represents a modest circa 4% of EBIT – about enough to offset cost inflation but not enough to contribute to earnings growth.

“Now at the back end of this program, we believe it will be more difficult for core Grocery EBIT to grow (~58% of EBIT) in the absence of more savings,” said Macquarie who has a $2.41 price target on the stock.

“Similarly, remaining Hardware synergies ($31.5m done; $2.5m to go) only represent 1% of MTS EBIT making the resi slowdown more apparent in Hardware core earnings.”

Credit Suisse was a little more charitable as it upgraded the stock to “neutral” from “underperform” and bolstered its price target by 9 cents a share to $2.60 as it factored in more cost reductions across the group.

However, the broker did highlight the risk of further sales declines in Metcash’s grocery division and warned that the housing downturn poses a threat to Metcash’s hardware business, which is 65% trade exposed.

Other supermarket stocks are also trading lower today. The Coles Group Ltd (ASX: COL) share price weakened 0.9% to $11.52 and Woolworths Group Ltd (ASX: WOW) share price fell 0.8% to $28.93 in the last hour of trade.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. 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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