THE DISTILLERY: Assessing Metcash
Several jotters trawl the bad news at Metcash for a big picture perspective, while another questions OneSteel's name change.
But first, The Sydney Morning Herald's Elizabeth Knight points out that the biggest shock from Metcash yesterday was news of $75 million to $90 million in impairment charges against two of its joint venture partners in Queensland.
"The issue is that there had been no hint to the market that these two supermarket groups, Cornetts and Walters, were in such dire trouble. This in turn raised the question of whether Metcash was sufficiently across the predicament of its joint-venture partners. If it was, why had it not conveyed this to the market before? Reitzer said Metcash was aware of the woes of Cornetts and Walters and had been trying to work with both to sort out their problems. … This poses the question of whether other Metcash joint-venture partners could be vulnerable."
However, in The Australian, Bryan Frith reckons the Metcash beating is overdone. It has responded to problems Knight outlines above, plus, contrary to widespread speculation, its plan to sell Franklins stores to independent operators is on track.
"But overall Metcash is travelling well. Its business model is robust and resilient. The strong Australian dollar, and the likelihood that it will remain strong for some time to come, and the reluctance of 'value-conscious' consumers to spend, has made retail difficult across the spectrum. … Importantly Metcash is at least holding its own within a constrained operating environment. While the writedowns will affect the reported result Metcash is maintaining its earnings guidance of low to mid single digit growth in underlying earnings per share for 2012. That guidance was given last November and it was an upgrade from the previous guidance of low single digit growth in EPS. It demonstrates that despite the difficult trading environment Metcash is still expecting a stronger second half year."
The Australian Financial Review's Matthew Stevens savages OneSteel's "awful" name-change to Arrium, but suspects chief executive Geoff Plummer has left himself a loophole.
"The interesting part about the name change, though, is that the heritage steel business will not actually wear the new badge. It will remain OneSteel. And that, in the end, leaves Plummer with the long-term option of revisiting history and severing a prosperous mining and mine services business from the company’s steel roots. To that end, it seems that, despite their obvious proximity, the steel and mining businesses remain substantially discrete. It would, apparently, be pretty easy to separate the steel operation and the magnetite mining that feeds it from the higher value hematite mining that is the root of Arrium’s export iron ore future."
Fairfax's Malcolm Maiden is concerned about the growing "dark pool" trade, where buyers and sellers are matched behind closed doors, and hits out at the Australian Securities and Investment Commission for ditching a plan to impose a $50,000 minimum trade size for entry into the shadowy system. He hopes the regulator will change its mind during the next round of consultations.
"The risk, though, is that ASIC and the securities industry will only agree there is a problem when that problem already exists. ASIC would then be in the same position as the northern hemisphere market regulators: looking for ways to turn back an unwelcome tide that had already come in. It was probably too much to hope ASIC would ignore the industry heavyweights and introduce the $50,000 rule immediately, as the ASX wanted. But having a rule-in-waiting in case there was a stampede of small trades into the dark seemed unexceptional, and conservative. With luck, the scrapping of the $50,000 rule is a precursor to the introduction of a new and better rule, and not the beginning of an unmoderated migration of share trades into the dark."
Meanwhile, The Australian Financial Review's Chanticleer columnist, Michael Smith, throws his weight behind Transurban's new chief, Scott Carlton, who surprisingly pipped the tollroad operator's current chief financial officer, Tom Honan, for the top job. Not only is Carlton liked by the market, says Smith, he's also a lot cheaper than the company's current boss.
In The Sydney Morning Herald, Michael Pascoe takes a look at Australia's latest retail sales figures, and suspects the subdued read indicates price deflation rather than less shopping activity – so the economy should be fine. And Fairfax's Peter Martin flicks through the International Monetary Fund's Accounting Devices and Fiscal Illusions paper, and ticks off the tricks Treasurer Wayne Swan will be using to get the budget back in the black – on paper, at least.
As NSW progresses its plan to open up certain public holidays for retailers, Fairfax's Michael West argues that shoppers don't want longer trading hours, and in The Australian Financial Review, Deirdre Macken wonders why retailers are making the push, given patchy trading hours in areas that are already deregulated.
Over at The Australian, Tim Boreham reckons its time to invest in financials – especially AMP and IOOF – while Barry Fitzgerald likes the mineral sands sector, and Base Resources in particular.
And finally, The Australian's John Durie throws cold water on the newfound confidence about the US economy on Wall Street, pointing out last year started with the same burst of optimism. And that ended with a European crisis.