My favourite ASX 200 turnaround story so far this year
Wholesale giant climbs 18% since June as hardware division restructure and housing recovery hopes drive analyst upgrades
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Mentioned
KEY POINTS
- Metcash shares have gained 18% since June following better-than-expected earnings guidance and a strategic merger of its hardware operations that should deliver cost benefits and operational efficiencies
- The company's hardware division is showing early signs of recovery with 1.1% sales growth, while food sales excluding tobacco surged 17% in the first seven weeks of FY26
- Multiple analysts have upgraded price targets with Buy ratings, viewing the hardware recovery as a multi-year opportunity as housing market conditions improve and interest rates fall
Metcash (ASX: MTS) has emerged as one of my favourite turnaround stories so far this year, with the stock climbing 18% since June after two key earnings updates highlighted a notable business turnaround.
The company, which operates IGA supermarkets, independent liquor retailers, and hardware stores across Australia and New Zealand, had been trading near three-year lows for most of 2024. But a combination of strategic restructuring and early signs of housing market recovery has caught the attention of analysts and investors alike.
Trading Update Sparks Rally
The turnaround began with Metcash's 10 June trading update, which delivered:
Underlying profit guidance of $273-277 million, slight ahead of $272 million consensus
Announced plans to merge its Independent Hardware Group and Total Tools operations into a single Hardware division
This modest earnings beat, combined with the structural simplification, was enough to trigger a sustained rally. The stock rallied 3.5% on the day of the announcement and a further 5.5% over the next eight trading sessions.
Metcash daily price chart, green circle for trading update | Source: TradingView
Several brokers also upgraded their price targets, with JPMorgan lifting its target to $4.40 (from $4.20) and UBS raising its target to $4.00 (from $3.50).
The positive momentum continued through to the full-year results on 23 June, with actual figures landing at the upper end of guidance.
Revenue up 8.9% to $17.3 billion
Underlying EBIT up 2.3% to $507.8 million vs. $504-508 million guidance
Underlying profit after tax down 2.4% to $275.5 million vs. $273-277 million guidance
Final dividend of 9.5 cents per share vs. UBS estimates of 8.9 cents (6.7% beat)
Early Signs of Hardware Recovery
The hardware division, which has been the primary drag on performance due to housing market weakness and intense competition, showed tentative signs of stabilisation. Total hardware sales posted 1.1% growth, having cycled the acquisitions of Alpine Frame & Truss and Bianco Building Supplies from the previous year.
More encouraging was the early FY26 trading update, covering the first seven weeks of the new financial year. Total group sales rose 4.7%, with food sales excluding tobacco up 17% and supermarket sales ahead 2.9%.
Post earnings, UBS retained a Buy rating, viewing the hardware recovery as a "multi-year opportunity" with the structural simplification being "prudent in challenging markets." The investment bank raised their target price to $4.25 from $4.00.
Food and Liquor Provide Stability
While hardware remains the key recovery story, Metcash's food and liquor divisions have provided crucial stability. The company's food division benefited from contract wins and market share gains, helping offset ongoing declines in tobacco-related sales that have weighed on supermarket foot traffic.
The liquor division, operating through Australian Liquor Marketers as the largest supplier to independent retailers, has maintained steady performance despite competitive margin pressure.
Analysts are particularly optimistic about the recent Superior Foods acquisition, with multiple brokers expecting further upside from new agreements across both food and liquor segments.
Housing Recovery Key to Hardware Upside
The investment case for Metcash hinges largely on the timing and strength of Australia's housing market recovery. As interest rate cuts gain momentum and housing indicators improve, the hardware division should benefit from increased construction activity and home improvement spending.
Goldman Sachs, despite maintaining a Sell rating with a $3.10 target, acknowledged the potential for operating leverage to return as housing conditions improve, though noted the timing remains uncertain.
The company's strategy of consolidating its hardware operations should also deliver procurement and labour benefits over the medium term, positioning it well for the eventual recovery.
The Bottom Line
Metcash's recent re-rating reflects a stock that had been written off due to earnings downgrades and challenging macroeconomic conditions over the past couple of years.
The share price demonstrated surprising resilience throughout 2024, with improving technicals as the stock reclaimed its 20, 50 and 200-day moving averages between late April and early May. This technical recovery, combined with a better-than-feared trading update, drove a sudden and sustained shift in momentum.
The rally gained further momentum from analyst target price upgrades, the stock's undemanding valuation relative to peers like Woolworths, and a better-than-expected final dividend. All these factors aligned to create a powerful turnaround story, with the stock surging as much as 22% from the first trading update on 6 June through to 7 July.
