MTS was smacked 9.2% on Monday after delivering a mildly weaker result and updating the market for the first four weeks of 2H FY26, sales were down 1.1%. Total food revenue (ex-tobacco) increased +4.3% in the first four weeks of 2H FY2 sales.
- Sales of $8.48bn v $8.47bn YoY, below $8.53bn estimates.
- Underlying profit $126.7mn, -5.9% YoY and 6.3% below consensus of $135.2mn.
- Underlying EBITDA of $367.2mn was +2% YoY.
- Interim dividend declared of 8.5c fully franked, putting the stock on a forecasted 5.4% yield over the next 12-months.
Metcash’s legal tobacco sales have dropped about 40% over the past four years, as IGA and Foodland grapple with surging illicit cigarette sales. CEO Doug Jones said recent state crackdowns on illegal tobacco are working and should be adopted nationwide, after weak legal-tobacco demand dragged on Metcash’s first-half revenue. The impact on MTS from tobacco has been dramatic; sales in its largest division, food, jumped 7.2% to $4.5 billion in the 1H, underpinned by both its supermarkets and convenience businesses, but including tobacco, sales fell by 0.8%. Total tobacco sales declined more than 35% to $637.8 million. MTS is among the sellers of legal cigarettes hit hard by the black market trade, which has been created by the government increasing tobacco excise by more than 280% since 2013, pushing the cost of a 25-pack of cigarettes over $50. Clearly, going too hard on disincentives has created unintended consequences.
While Tobacco sales are struggling, of more importance to MTS is Hardware, which forms one of the pillars in our investment thesis for owning the stock. Revenue lifted +2.5%, with growth expected to accelerate into 2Q26, despite a backdrop of muted trade activity and heightened competitive intensity. The recovery is underway but remains state-divergent, with QLD, WA and SA showing solid improvement, while VIC and NSW continue to lag.
The IHG retail network posted positive LFL growth of +2.8% signaling early signs of stabilisation. Total Tools delivered a stronger top-line performance, supported by recent store additions. Looking ahead, we retain confidence in the IHG recovery trajectory, albeit on a more extended timeline. Total Tools’ momentum has improved, though elevated competitive pressures are persisting.
Following yesterday’s sell-off, MTS is only trading ~10% below its average 5-year valuation, cheap in an expensive market but not overly compelling in a market that’s reticent to quickly buy stocks after disappointing results. Universal downgrades came though this morning; Macquarie Price Target Cut 13% to A$3.50/Share, Cut 8% to A$4.00/Share by UBS, Cut 7.7% to A$3.60/Share by Citi & Cut 11% to A$4.00/Share by Jefferies
- We felt yesterday’s sell-off was a bit overdone, and believe relative valuation + solid yield makes it worth holding on to in our Active Income Portfolio.
MM likes MTS for yield around $3.40
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