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  • Writer's pictureMarcus Bogdan

Portfolio Changes - Sell Coles (COL) and Initiate Metcash (MTS)

Australian Equities Income Portfolio

We have exited our position in Coles (COL.AX) and initiated a new position in Metcash (MTS.AX) for the Australian Equities Income portfolio.

Metcash is Australia’s leading wholesale distribution and independent retailer services company with operations across the food, liquor, and hardware businesses. The company has recently announced their 1HFY23 result, exceeding market expectations. The group saw robust demand and sales volumes, together with the acquisition strategy, underpinning a 8.2% increase in group revenue and 10.3% uplift in underlying EBIT.

The food business demonstrated good momentum from better price competition, highlighting a constructive relationship with retailers to ensure competitiveness against the major supermarkets. The implementation of the strategy in pricing, ranges, and store quality has sustained the market share gain.

The hardware business reported 17.9% increase in EBIT for 1H23, driven by strong demand in the Trade and DIY segments as well as the increasing contribution from company owned and JV stores as the group continues to execute the strategy in consolidating the store network with JV or acquisitions. We see Hardware continue to provide growth as the company focuses on footprint expansion and leveraging the flexibility in the operating model.

The Liquor business has reported a 11.3% uplift in EBIT and continues to gain market share. Metcash now supplies 90% of independent liquor stores in Australia via the Independent Brand Australia (IBA) network with 1,473 stores in Australia and 350 in New Zealand. EBIT increased 11.3%, benefitting from the strong on-premise consumption.

The higher earnings and healthy financial position enabled the group to announce an interim dividend for FY23 of 11.5 cents per share, up 9.5% on 1H22 and provides a 12m forward dividend yield of 5.12%. Metcash has reported a strong outlook for the first 4 week of 2H23 with supermarkets sales up 3.2% (+9.5% ex tobacco), hardware sales up 8.0% and liquor sales up 8.9%. Metcash now trades on 12m forward PE of 13.7X, a ~40% discount when compared with Coles at 20.7X and WOW at 23.9X.

At a time when we see higher execution risk from Coles’ capex spending program on its distribution and fulfillment centres, our preference is to tilt the portfolio to a quality value play with a superior dividend yield.


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