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Metcash Shares Gain Despite $384m Loss

Metcash Shares Gain Despite $384m Loss
Jun 15, 2015 By Simon Herrmann

IGA wholesales Metcash Limited (ASX:MTS) has announced a $384m net loss for the financial year ended 30 April 2015. Metcash also announced the sale of its automotive division to Burson (ASX:BAP) for $275m.

Shares of Metcash have gained 2.5% this morning and are trading at $2.13 around 12:30pm as the results appear to be slightly better than the market had anticipated. We have to consider that MTS has lost nearly 60% in the past 12 months and retreated 38.5% so far this calendar year, which is a strong indication of investor sentiment towards Metcash.

As we are looking at the results in detail, Metcash announced a 1.7% increase in sales revenue totalling $13.6bn. Underlying EBIT was in line with the guidance provided in December 2014 resulting in a surplus of $325.1m, which is a decrease of 16.6% compared to pcp. The net loss is due to significant item charge of $640m which predominantly relate to intangible assets such as goodwill and according to the company will not impact debt facilities.

Management recognises the challenging conditions and points to difficult conditions for Metcash’s Food & Grocery operations during FY16. Whilst the market values today’s results as slightly better than expected, shareholders have to be prepared for ongoing headwinds over the next 12 months.

Metcash also announced that it has reached an agreement with Burson Group Limited to sell its automotive business for $275m. The purchase price multiple of 9.9x FY2015 EBIT recognises the value and provides Metcash with much needed cash. On 14th May 2015 Metcash had announced that it was conducting a strategic review of its Automotive Division and was considering an IPO which would have created a separate listing. It appears that the company believes that the sale to Burson is the more appropriate solution, as it enables management to wrap up the deal as quickly as possible and focus on the Food and Groceries Division.

Wise-owl has not recommended Metcash in any of our model portfolios and we do not intend to initiate coverage in the near-term future.

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Simon Herrmann Author: Simon Herrmann Jun 15, 2015

Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.

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