Re: MTS - Metcash
MTS given a fair old whacking for a mixture of dollar raising, costs incurred and just general ho hum!
Was it deserved? You'd think so - and they seem pretty intent on more acquistions? My guess is that the current price squeeze from Coles and Woolworths is putting the pinch on Metcash - and in order to grow they need to buy...
Thoughts?
Well, first, Metcash has been dealing with the Wollies/Coles squeeze for many, many years. I can never quite work out how they do it, but their record speaks for itself.
Counter to that, the current phoney price war between Coles and Woollies has gathered significant public mindshare and it is biting. (I say "phoney price war" because the Coles strategy has been to make spectacular cuts to things like milk and bread but balance those very public cuts with sneaky increases in almost everything else,
and at the same time squeeze the farmers and suppliers 'till their noses bleed. Notice that, at least on the latest figures I have seen, Coles gross margin on items sold has gone UP, not down. Very smart marketing there.) But it would not do to overestimate the effect of the war. It's not all that far from business as usual, and Metcash is fighting back with its own campaigns. So count it as a factor but do not get carried away with it.
Metcash can't see much organic growth in the next few years. Like Wollies and Coles, Metcash reckon that the Australian market has plenty of supermarkets already and the only way for them to expand much is to diversify. All three have already done that with liquour and hardware and (for the two majors) petrol and even banking and insurance. Metcash has found its own answer with the car parts business (a very smart buy in my view) and also with their upcoming undisclosed $90 million purchase. (Well, we hope that one is as smart a move as the car parts one was - we will have to wait and see.)
The Mitre-10 purchase (they already owned half) makes sense. It is returning decent profits, so why not have more of it? And having a hardware chain can be seen these days as a necessary defensive asset if you want to sell groceries. Woollies certainly see it that way - look at the vast sums they are pouring into their Masters adventure.
The last main factor I'm going to consider is the regulatory environment. On the plus side, things could get a bit fairer. Some of the worst of the anti-competitive Colesworth real estate rorts have been clamped down on. Also on the plus side, the big two are very much on the nose in regulation-land - the Greens and about half the Labour Party are alarmed at the consumer effects of their nastier monopolistic practices and want to take action, the National Party is even more alarmed because of their evisceration of the supply chain (count the Greens in on this one too); only the Liberals are still stuck in let-'er-rip mode. On the minus side, politicians practically never actually
do anything, and the government body responsible for actually taking action, the ACCC, has a shameful history of bending over and taking it from Colesworths (this is how we got to an 85% duopoly problem in the first place, remember, gutless inaction from the ACCC) and (apparently) an unexplained down on the only serious candidate to shake the duopoly up (Metcash) - look at their absurd and costly stance which led to the Franklins court debacle. Overall, call the regulatory environment even, neither good news nor bad for Metcash.
current share price 3.19 What would you do?
I see a solid company with some relatively minor problems and growing pains being sold for 20% less than fair value. It has good prospects and lower risk than a lot of things most of us invest in. Back when it was 4.00 or so I often thought about buying some as a dividend stock, but always wound up getting something else instead. But when it dropped to not much over $3.00 it became compelling value. I bought in at about $3.20. The way I see it, it's an excellent chance to go back up to somewhere around the $4.00 mark in perhaps a year or two, and if it does I have a very nice little capital gain. And if it doesn't, well, I still have my $3.20 and I've been paid three or four very nice fat fully-franked dividends. The risk that Metcash will just go down and down and leave me out of pocket is there, of course, same as with any company, but it seems to me to be quite a small and manageable risk to set against a double-chance benefit of fat dividends and capital growth. I only bought a modest parcel but if I can find some spare cash lying around I might get a bit more.