Metcash Limited’s [ASX:MTS] share price has slid down the ASX today by nearly 5%, only days after releasing its full year results.
Despite a mixed response from the market, the grocery wholesaler’s shares enjoyed a short climb on Monday, attributed in part to the announcement of a $125 million buy-back strategy.
But Deutsche Bank, in a broker note, has expressed doubt that the company’s tactics will be enough to stop an earnings decline. The stock has subsequently been downgraded to a sell with a reduced price target of $2.50.
Why has the stock been downgraded?
Though sales across various areas experienced growth, such as in the hardware and liquor segments, Metcash revealed a statutory loss after tax of $149.5 million.
The company has said the loss is due to the impairment of goodwill and other net assets to the value of $346 million.
A buyback strategy was announced on Monday, which — at a price discount between 8% and 14% — comprises a fixed capital component of 61 cents and the remainder a fully franked dividend. Some investors appeared to leap at the potential to obtain benefit from franking credits, but may have balked at the broker’s downgrade today.
What’s next for Metcash?
On the back of the broker note, other analysts have recommended that investors stay away from Metcash. Citi, in particular, has cited the lack of organic growth in its food business as sufficient motivation.
But this could be a momentary fall in interest. Buy-back strategies invariably attract critique, as the market naturally wonders if money is being put to best use. After Drakes Supermarkets in South Australia withdrew its support back in May, we knew this was coming and so it’s hardly a surprise.
The wholesaler giant has said it is planning to improve infrastructure, reduce costs, and work even harder to remain abreast of the competitive supermarket sector. Morgan Stanley believes the buyback and the lift in hardware synergies should fuel an earnings upgrade cycle.
Compensation for the loss could take time, but it’s not impossible. The question from here seems to be: Can the growth of Metcash’s liquor and hardware outweigh the death of its food and grocery segments?
On today’s decline, the market remains wary.
For Money Morning
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