Metcash Disappoints

Sydney, June 6, 2007 (ABN Newswire) - Australia's third retailing force, the independent wholesaler, Metcash Ltd, disappointed yesterday when it missed most analysts targets for its 2007 profit and doubled up with a less than optimistic forecast of a smallrise in earnings in the 2008 year.

The shares shed 56c at one stage before bouncing a bit to close at $4.81, 37c lower on a huge turnover for the stock of 33 million shares. That's was alarge 4.4 per cent of MTS's issued capital.

Other retailers fell. Woolworths slid 50 cents to $27.64 and Coles dropped 16 cents $16.72.

It would seem there have been some speculators playing in the Metcash share register and had perhaps been hoping for a bid or a private equity play.

It's obviously a vote against Metcash being involved in any corporate activity.

Up until Monday, Metcash shares had risen 11 per cent in the year to date amid all the speculation associated with the ownership of Coles Group.

Metcash's net earnings came in at $168.8 million, compared to some analysts' estimates of $170 million to $177 million. It forecast 2008 earnings would rise 'in the high single digit range' (Like 8 or 9 per cent).

Metcash said in its profit statement that:

1. • Total revenue rose 18% to $9.7 billion and Wholesale sales rose by 22.7% to $9.5 billion

2. • EBITA grew 38.8% to $315 million, $314 million after non-recurring items

3. • EBITA margin increased to 3.33% from 2.95% before non-recurring items

4. • Group net profit after tax increased 41.6% to $174 million before non-recurring items

5. • Net profit after tax grew by 105.5% to $167 million

6. • Cost of Doing Business as a percentage of gross profit fell by 0.34% to 66.86%

7. • Earnings per share grew 62% to 22.15 cents or 23.23 cents normalised

8. • Dividends increased 48% to 17 cents fully franked with a 10c a share final. That's a payout ratio of around 77%, compared to the new policy of around 60 per cent. Perhaps the right thing would have been to maintain a generous payout ratio into the current year to try and offset the disappointing news about the lower than expected outlook

That outlook for the current year didn't make it into the list of highlights:

"Sales for the month of May 2007 continue to be satisfactory. With the uncertainty existing in the retail food and liquor market at present as a consequence of the proposed sale and break up of the Coles Group, earnings growth for the 2008 financial year is expected to be in the high single digit range."

The rise in net earnings might have looked impressed at 105%, but according to some analysts it was expected given that it was driven by the contribution from the acquisition of the old Foodland businesses over a full year.

The outlook figure has a big hint of the Metcash of old, eking out small gains in margin and earnings, which is the lot of the wholesaler because of the high cost of doing business and the difficulty of recovering all cost increases from customers in a timely fashion.

CEO Andrew Reitzer said in the statement yesterday:

"The result reflects both a solid underlying performance by the core operations as well as the gains flowing from the acquisition of the Foodland Associated Limited (FAL) Australian operations.

"Metcash has been successful in achieving its targeted $80-90 million FAL profit and synergy gains, posting gains of $87 million. The one-off restructuring costs and retail losses on the performance of FAL's former Action stores were exclusive to the first half's trading.

"In Metcash's core distribution division, retailer confidence remains high as evidenced by new store growth, store reinvestment, and legacy sales growth of 7.8% (excluding FAL acquired businesses). Pure like-for-like growth (excluding new stores) in the IGA branded business was higher at 8.71% excluding Western Australia and 10.3% including the rebranded WA IGA stores (alone up 17.2%).

"The launch of IGA in WA and success of our 'Local Heroes' marketing campaigns have underpinned excellent sales growth, with market share in the last quarter of the year increasing to 19%.

"Metcash's specialised convenience distribution division, Campbells Wholesale had an excellent year benefiting from the addition of the WA FAL operations, improved negotiating ability arising from its new national footprint, increased 'modern' petrol and convenience market share and improved sales mix.

"Australian Liquor Marketers, the company's liquor division, experienced increased sales reflecting ongoing success in its rationalisation of banners under the umbrella of IBA whilst suffering reduced EBIT margins from the increased competitive environment and investment in banner consolidation.

"The Group's position as the clear 'third force' in the grocery and liquor market has allowed it to establish a range of ongoing growth drivers in each of its business divisions.

"The Group is well placed to capitalise on its positive momentum and anticipates another strong performance in the year ahead," said Mr Reitzer.

All very impressive but the news that did surprise the market was the downturn in earnings at ALM, which is one of the largest liquor wholesalers in Australia. With rising competition from Woolies and Coles, not to mention Fosters and Lion Nathan moving deeper into distribution, ALM is finding the market tougher to make headway in.

Metcash said that ALM's sales increased 1.9 per cent from $2.407 billion to $2.453 billion, a strong result in view of difficult market conditions and the loss of the Queensland based Coles/Hedley business.

"Reflecting those conditions and further investments in banner consolidation and marketing, EBIT fell 7.5 per cent from $30.7 million to $28.4 million.

"A range of strategies has been implemented to stablise trading performance and provide a growth framework. This includes the merger of ALM and Independent Brands Australia reporting structures to remove duplication, streamline the business and reduce costs. A cost reduction of approximately $4 million will be achieved in the 2008 financial year.

"Growth will be achieved through further investment in IBA marketing and banner growth and a strategic alliance with the Liquor Alliance. IBA membership has grown to 2,290 independent outlets whilst the Liquor Alliance consists of six external banners representing 653 hotels that have joined together under two brands.

"ALM continues to work on improving its operating efficiencies, with the implementation of web-enabled ordering for customers, further reductions in overhead costs and rationalisation of its warehouse network."

If most ofthose $4 million in cost savings flows through to the bottom line this financial year that will merely restore ALM's earnings to their 2006 levels. The supply business isn't getting any easier and the uncertainty about Coles ownership hasn't helped.

The core to Metcash is the grocery distribution business IGA.D. The company said it "continued to reap the benefits of a strongly growing 'legacy' business and the FAL acquisition, with a 40.7 per cent rise in Earnings Before Interest and Tax (EBIT) from $175.8 million to $247.3 million.

"Wholesale sales rose 27.6 per cent from $4.4 billion to $5.6 billion, with EBIT to sales margin rising from 4.02 per cent to 4.43 per cent.

"Total IGA branded stores 'like on like' sales growth for the year was 10.3%. Within this, the ex-FAL Western Australian stores grew by 17.2% and the 'legacy' IGA branded stores by 8.7%. Overall 'legacy' business sales grew by 7.8% or 5.8% if new stores are excluded.

"During the year, 42 new IGA stores were opened, adding 48,000 square metres of retail space with 23 store extensions adding a further 13,000 square metres. 252 new stores are 'on the books' for assessment and development. "

The other major business is Campbell's Wholesalers which enjoyed "another successful year with sales increasing by 23.5 per cent from $1.147 million to $1.417 million, and EBIT growth of 36.1 per cent from $21.2 million to $28.9 million.

"A key factor in the improved profitability was the continued growth of sales in the main categories of confectionery, grocery and food service, with these grocery categories growing by 40%. The division continues to grow market share in the 'modern' petrol and convenience sector."

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