Is the Metcash (ASX:MTS) share price being smoked by the Federal Budget?

The Metcash Limited (ASX:MTS) share price has been under pressure today after the company released a response to yesterday’s Federal Budget.

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Metcash Limited (ASX: MTS) shares have been under pressure today after the company released an update in response to yesterday’s Federal Budget.

After spending most of the morning in the red, the Metcash share price is currently trading 1.16% higher at $3.48. In comparison, the S&P/ASX 200 Index (ASX: XJO) is down 1.14% at the time of writing.

Let’s take a look at what the wholesale distributor announced. 

Tobacco excise

The Metcash share price is under pressure today after an update to investors in response to yesterday’s Federal budget.

In the update, Metcash flagged a $10 million hit to its earnings, noting that the budget did not include an increase in tobacco excise duty for September 2021.

Metcash advised that it has historically recognised a share valuation gain in its food pillar based on the value of tobacco stock on hand at the time of the excise duty and the related sales price increase. As a result, Metcash noted that this gain flowed through to earnings as the tobacco was sold.

With no excise increase in September, Metcash expects a net adverse impact in fiscal 2021 of $10 million in earnings before interest and tax (EBIT). The company noted that the impact would be reflected in its financial statements for the first half of FY22.

Metcash added that should the government reduce or discontinue its 12.5% tobacco excise, the company would work with tobacco suppliers to ensure appropriate remuneration.

About the Metcash share price

Earlier this year, the Metcash share price hit a new 52-week-high of $3.84 per share. Shares in the company went flying after Metcash reported strong retail sales and market share growth in March. The conglomerate highlighted strong sales momentum for all business segments in the second half of 2021.

As a result of a strong balance sheet and underlying cash flow, Metcash also announced an increased target dividend payout ratio. As a result, the company announced that 70% of underlying net profit after tax would be paid to investors effective FY21.

However, the Metcash share price has fallen more than 11% since hitting a new 52-week high in March. Its shares continue to be targeted by short-sellers. According to ASIC’s short position report, Metcash has a short interest of 7.3% with investors predicting a drop in the company’s market share.

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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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