Metcash (ASX:MTS) share price charges higher after reporting FY 2021 profit surge

Metcash has handed in its full year results this morning…

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The Metcash Limited (ASX: MTS) share price is on the move this morning following the release of its full year results.

At the time of writing, the wholesale distributor’s shares are up 3% to $3.77.

How did Metcash perform in FY 2021?

For the 12 months ended 30 April, Metcash reported a 9.9% increase in revenue to $14.3 billion. This was driven by a 3.1% increase in Food sales, a 19.2% jump in Liquor sales, and a 24.7% lift in Hardware sales.

Things were even better for its earnings thanks to margin expansion. This saw underlying group earnings before interest and tax (EBIT) increase 19.9% to $401.4 million and underlying profit after tax jump 27.1% to $252.7 million.

Also growing strongly was its operating cashflow, which came in at $475.5 million. This was more than quadruple the $117.5 million it reported a year earlier. This strong cashflow generation allowed the company to declare a full year fully franked 17.5 cents per share dividend, up 40% on the prior corresponding period.

In addition to this, the company has lifted its target dividend payout ratio from 60% to 70% of underlying net profit after tax and announced a $175 million off-market share buy-back.

How does this compare to expectations?

Although this was undoubtedly a strong 12 months, Metcash appears to have delivered a profit result a touch short of the market’s expectations.

According to a note out of Goldman Sachs, its analysts were expecting the company to record an 8.2% increase in revenue to $14,088 million and an underlying EBIT of $432.3 million. The latter compares to its actual underlying EBIT of $401.4 million.

Nevertheless, judging by the Metcash share price reaction today, investors don’t appear to be concerned by this.

What were the drivers of its growth?

Metcash CEO, Jeff Adams, revealed that the record sales result was driven by strong performances across all pillars, supported by its MFuture growth initiative.

He commented: “The early success of our MFuture initiatives laid the foundations for a very successful year for Metcash and our independent retailers, with their improved competitiveness being a key factor in the retention of new and returning customers gained though COVID. This, together with the continuation of an increased preference for local neighbourhood shopping and the migration from cities to regional areas, has driven strong sales growth across our independent retail networks, significantly improving their overall health.”

“From an earnings perspective, strong growth was achieved in all Pillars, with Liquor and Hardware standouts delivering EBIT growth of ~22% and ~62% respectively, and contributing to an improvement in the Group’s operating leverage. Our Food pillar also performed well, delivering much higher underlying earnings while continuing to support its retail customers through a challenging environment,” he added.

Total Tools investment

Potentially giving the Metcash share price a lift today was news that it is increasing its investment in the Total Tools business.

The release explains that Metcash has increased its ownership in Total Tools from 70% to 85% for an acquisition cost of $59.4 million.

Management notes that Total Tools has a history of strong performance, which has continued since Metcash acquired its 70% stake in September last year. For the eight months ended 30 April, the business contributed EBIT of $24 million.

Outlook

Metcash revealed that it has continued to benefit from the shift in consumer behaviour with strong sales in the first eight weeks of FY 2022. Food sales are up 13.7% over the period, Liquor sales have increased 26%, and Hardware sales have jumped 29.1%.

However, it has warned that there continues to be some uncertainty over the potential impact of any future COVID-related trading restrictions or changes in consumer behaviour. As a result, no guidance has been provided for the year ahead.

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