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Goldman says buy the Metcash (ASX:MTS) share price ahead of next week’s results

metcash share price
Credit: Scott Lewis

The Metcash Limited (ASX: MTS) share price is outperforming after Goldman Sachs reminded investors why they should be buying the stock ahead of its interim profit results.

The Metcash share price jumped 2.1% to $3.16 this morning when the S&P/ASX 200 Index (Index:^AXJO) gained a modest 0.2%.

The grocery distributor is even outperforming its peers. The Woolworths Group Ltd (ASX: WOW) share price dipped 0.2% to $37.77 and Coles Group Ltd (ASX: COL) share price is stuck around breakeven at $17.99 at the time of writing.

Sales optimism lifts Metcash share price

Goldman is forecasting an 11.5% increase in first half group revenue to $7.01 billion as it reiterated its “buy” recommendation on the stock.

The loss of a lucrative supply contract with 7-Eleven isn’t enough to keep Metcash from expanding its top line either.

The broker is tipping Metcash’s food segment will grow by 7.6% as a 12% uplift in the group’s supermarket business offsets the 10% drop in the convenience business.

Tailwinds supporting margins

Further, pre-AASB 16 earnings before interest and tax (EBIT) margins are forecast to increase by 20 basis points (bps).

That’s not a bad outcome given than its larger rival Woolworths is experiencing some margin pressure from the COVID‐19 panic buying rush.

Food inflation is also providing a tailwind with the latest retail sales data and experts pointing to more good times ahead for the sector.

Biggest revenue growth segment

However, the real standout in Metcash’s results is the performance of its hardware division. Rival Bunnings, owed by Wesfarmers Ltd (ASX: WES), is going gangbusters. What’s good for the goose…

Goldman is expecting revenue from Metcash’s hardware division to surge by 27.5%, although EBIT margins are forecast to dip by 12bps.

“Overall, we forecast group NPAT to be at A$116.3mn on an underlying basis and A$114.9mn on a statutory basis,” said Goldman.

“Operating cash flow is forecast to be at A$225.7mn (post AASB16) and we expect the group to have a net cash position of A$61.9mn.

“We forecast the group to announce an interim dividend of A¢6.”

Metcash share price at risk of dividend disappointment

Just be aware though that Goldman’s forecasts are ahead of consensus. For instance, the average analyst revenue forecast is $6.88 billion.

The other potential danger point is Metcash’s interim dividend. While Goldman is ahead of its peers in earnings and sales expectations, its dividend outlook is more conservative. Consensus is expecting an interim dividend of 6.2 cents.

If Goldman is right and Metcash only delivers a 6 cent dividend, that could trigger a sell-off on the day of the announcement.

Metcash is scheduled to release its earnings report card on Monday.

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Motley Fool contributor Brendon Lau owns shares of Woolworths Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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