Metcash cancels the dividend
Recommendation
Wholesaler Metcash is slowly – but belatedly – acknowledging that its debt levels are simply too high for the 'increasingly competitive trading environment'. On 15 June the company will announce its results for the year to 30 April 2015, results that are likely to show net debt exceeding $900m.
The seasonal nature of its business means that net debt is usually significantly higher than it reports at year-end – and it's too much for a company with a market capitalisation of barely $1bn.
Todays' announcement that Metcash will cancel at least the next three dividends is proof the company needs to conserve cash. It comes on top of the recent announcement that it intends to float its automotive distribution business on the ASX, a move that might raise $200m or thereabouts.
All this might be insufficient. Another highly dilutive capital raising is a real risk, particularly as competition from Woolworths and Coles is, if anything, intensifying.
Today's announcement, which also included goodwill writedowns of $640m, tried to soothe nerves by stating that underlying earnings before interest and tax for 2015 would be consistent with previous guidance of $315m–330m. Of course it's the future that matters and 2016 earnings will certainly decline.
The stock has fallen 16% today and is now down 59% since Metcash model is fundamentally flawed on 24 Mar 14 (Avoid – $2.85). At some point we'll take another look but there's no urgency given the balance sheet issues that need to be resolved. AVOID.