Metcash: time to cash in
Recommendation
The trigger for this astonishing performance has been the decision of Dairy Farm International to sell its Franklin stores. Metcash is the main beneficiary and the purchase of more stores has led to significant earnings upgrades. So, what should subscribers do now?
First you must remember that when a stock rises so quickly, things can cool just as fast. Once the market sits back and waits for Metcash to deliver on the projected large boost to earnings, there's a fair chance this could happen.
Retailers in favour
That's a good enough reason in our view at least to lock in some profits. On the other hand, retailers are flavour of the month with Woolies breaking $10 and the decidedly less impressive Coles Myer rising too - at least before its profit warning.
Metcash, a wholesale marketer and distributor of food and other consumer goods, owns IGA, Campbell's Cash and Carry and Australian Liquor Marketers. Here's how the Franklin's deal works.
Metcash oversees the sale of close to 140 Franklins stores to independent buyers who will use Metcash as their wholesale supplier of supermarket goods. That should mean an extra $1.2bn in wholesale revenue. With food sales of close to $4bn last financial year, that's a big increase.
And there's a good chance that a fair proportion of this revenue will make its way to the bottom line. The latest result shows net profit of $32.7m, up from last year's effort of $1.1m.
The negative abnormals were outweighed this time round after a $10.3m profit contribution from the John Lewis Food Service sale in April.
Total revenue increased 16% and a final dividend of 1.5 cents a share was declared. Despite the dominance of Coles and Woolies, Metcash increased its market share by 1% to 13%.
While underlying operations are travelling nicely, Metcash could be seen in a similar light to the recently departed Impulse Airlines, sandwiched as it is between two big competitors.
Sole provider
These concerns are exacerbated by the fact that South African giant Pick 'n Pay has snapped up around 80 Franklins and Fresco stores. Metcash is to be the sole provider, but only for two years at this stage. If it is a success, Pick 'n Pay would be in a position to drive a harder bargain, or even set up its own distribution network.
Metcash has busy times ahead dealing with its newly acquired bulge but there's still a chance the price could run further.
However, as we have said many times in the past, there's nothing wrong with locking in some profits. With a gain of 167% since our first favourable recommendation, we'd put some of it in the bank. TAKE PART PROFITS.