MTS reported 1H25 results on Monday that were in line with recently downgraded guidance. However, the important part of the update was refreshed insight into how trade was tracking to start the 2H, with noticeable improvement across hardware and liquor, two areas the market had concerns about.
It’s been a volatile period for MTS, with weaker-than-expected performance leading to a significant downgrade from Goldman Sachs late in October – the right call at the time, with the company subsequently reducing guidance. That sent shares down to a ~$3 low, having been above $4 earlier in the year. Monday’s trading update negated this trend, and ultimately led to Citi upgrading the stock to buy with a $3.70 price target underpinning a very strong bounce in the shares.
The trading update for the first four weeks of 2H25 showed improved momentum in Liquor (sales +4.4% versus flat implied 8 September to 20 October) and Total Tools (sales flat vs down ~1% implied 8 September to 20 October) since the 25 October announcement. Food sales excluding Superior Foods and IHG were in line. Further, MTS now expects the Hardware segment to trade better in the 2H, with Citi concluding that earnings have likely bottomed in Hardware. Combined with a more resilient earnings outlook for Food and reasonable valuation (trading at a ~40% discount to its 2 year average), MTS looks good for further upside.
This update will clearly allay some market concerns in key areas, and when overlayed by such a depressed valuation, MTS should continue to recover in MM’s view. Assuming MTS trades back to its average PE, shares should be at $3.65. While the dividend was lowered to 8.5cps fully franked for the half, this will edge higher in line with improved earnings over time, putting it on a 12-month expected yield of ~5.5%. MTS trades ex-dividend on the 13th of December, so over the next 13 months, we will pay around 30c out in fully franked dividends, which we view as attractive for our Income Portfolio based on current prices.
MM remains long & bullish MTS
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