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Metcash share price on watch after $237 million impairment

The Metcash Limited (ASX: MTS) share price could be under pressure in early trade after announcing a significant impairment this morning.

What did Metcash announce today?

Metcash announced a big impairment to be recognised in its first half results for the year ended 31 October 2019.

The retail wholesaler will recognise a $237.4 million after tax impairment to goodwill and other assets in its Food segment.

The Metcash share price could fall lower this morning as investors readjust their valuation estimates following the news.

Metcash is reviewing the carrying value of its assets as part of its preparation for its 1H 2020 financial statements. 

This follows its 22 November announcement that 7-Eleven will not be renewing its current supply agreement after 12 August 2020. The Metcash share price plummeted 9% lower on the ASX following the news.

That 7-Eleven deal is expected to result in a loss of $15 million in earnings before interest and tax in its Food segment after adjusting for cost savings.

Now the company has impaired its business by $237.4 million in accordance with accounting standards. The impairment is non-cash in nature and won’t affect its debt or banking covenants.

How has the Metcash share price performed in 2019?

The Metcash share price is up 23.95% higher and closed at $2.95 per share yesterday.

The food wholesaler has a number of well-known brands in its portfolio including IGA, Mitre 10 and Home Timber & Hardware.

Metcash boasts a market cap of $2.68 billion prior to this morning’s open and trades at a 14.3x price-to-earnings multiple.

The Metcash share price gains puts marginally ahead of the S&P/ASX 200 Index (INDEXASX: XJO) this year. The Aussie benchmark index is up 23.47% as at yesterday’s close and is just shy of a new record high.

However, fellow food retailers Coles Group Ltd (ASX: COL) and Woolworths Ltd (ASX: WOW) are both outperforming Metcash on the ASX this year.

Coles shares are up 39.62% while Woolworths has gained 36.43% since the start of January.

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Motley Fool contributor Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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