Metcash Limited (MTS)

By Jason Fittler

MTS – is a wholesale distribution and marketing company.

In terms of food and grocery distribution, it supplies IGA supermarkets (which account for 16% of all supermarket sales in Australia), Foodland, Foodworks, 7-Eleven and BP. It owns Australian Liquor Marketers, Australia’s largest broad range liquor wholesaler, supplying over 15,000 hotels, restaurants, and liquor stores such as Cellarbrations and Bottle-O.

In hardware, the company supplies Mitre 10.

The company also owns 75.1% of Automotive Brands Group, Australia’s largest privately owned distributor and franchise operator in the automotive parts and aftermarket sector.

Looking forward, growth will be underpinned by continued expansion and scale efficiencies in food distribution.

The greatest challenge will be to maintain its position against the might of Woolworths and Coles.

Profitability is moderate with return on equity averaging 12% for the past three years.

In terms of its debt profile, gearing is a little high at 70% but the defensiveness of its earnings and interest cover of 3.5 times should placate concerns.

MTS is trading on 11 times 2013 earnings and paying a gross yield of 11.5%. They have a Fair Value target of $4.40 on the stock versus current share price of $3.63.

This is a long-term company which you may see some weakness over the coming 12 months.

It is a good time to start to build a holding in the company.

If the dividend is cut, you can expect to see some share price weakness which will provide an opportunity to top up the holding.

For more information on Metcash Limited (MTS) please contact us on 07 4771 4577.