Challenging conditions in the Hardware division, loss of market share in supermarkets and group margin pressure have been the key factors weighing on investor sentiment for Metcash (ASX:MTS) over the last 12 months. We recently researched MTS in The Dynamic Investor to assess the prospects for a re-rating in the shares.

About Metcash

Metcash is Australia’s leading wholesale distribution and marketing company for the independent grocery channel. The Company has a diversified business across the food, grocery, hardware and liquor sectors and is the 4th largest player in the domestic supermarket segment.

The Company operates via three divisions: Food, Hardware and Liquor. Hardware is now the largest contributor to group earnings and the key growth driver. This follows the acquisition of Total Tools in FY21, which merged the number one and two hardware industry wholesalers.

Within the Food division, MTS supports a network of ~2400 independently owned stores across Australia, mainly under supermarket banner IGA (1,238). MTS provides procurement, logistics, marketing and retail development services. Further expansion into the food services vertical, via the recent acquisition of Superior Foods Group in February 2024, adds diversification and growth to the Food division.

Key Fundamental Drivers

Can Metcash Improve Share in Supermarkets?

MTS lost market share in FY26, with supermarket sales growth of +2% below industry forecasts. Recent foot traffic data points to engagement loss since March to Aldi and Coles. This has been driven by the cost-of-living crisis and Middle East conflict, leading to consumers shifting to cheaper options vs MTS’s convenience-based offering. However, the Company is aiming to further narrow the price gap of IGA stores compared to the major supermarkets by improving customer price perceptions, as opposed to continued price investments.

Over the longer term, MTS has an opportunity to improve its market share in food via improved price perception and investment in its new Extra Specials Promotions program. The Company has already made meaningful progress in strengthening its competitiveness against the major supermarkets by: i) Accelerating its own-brand offering, ii) Establishing adjacencies like retail media, iii) Increasing its presence in health ⁄ baby ⁄ beauty products and iv) Investing in online and loyalty.

Challenging Conditions in Hardware & Tools to Continue

The Company has flagged conditions in the Hardware segment are expected to remain challenging for the remainder of FY27, driven by a deteriorating housing sector. Trade demand, which accounts for ~60% of the hardware division’s business, has long lead times for construction and building work. This means the Hardware division’s firm trading environment reflects last year’s rate-cutting cycle rather than this year’s tightening cycle. Further, the refreshed trade loyalty program of the rival Bunnings’ hardware business, as well as Bunnings extending its tools range, will increase competitive pressure.

Retail margins are also under pressure, and this is expected to continue, as broader conditions soften. Management has noted that it has focused on product range, and other elements outside of price to drive sales. However, there is the possibility that greater promotional intensity and/or further cost savings may be required to support EBIT growth in FY27.

Weaker housing activity, particularly prices, presents downside risk to sales & earnings, given the impact from reduced demand for renovation, repair and construction-related products. Having said that, there are key offsetting factors for MTS:

• A significant portion of Hardware sales comes from repair and maintenance, which is more resilient than new builds or major renovations;
• MTS’ customer base includes trade professionals, whose demand is generally steadier than DIY demand.

In terms of expectations for EBIT margin, ongoing weakness in housing at a national level, coupled with continued retail margin pressure support the view for EBIT margin to remain flat in FY27. A slight improvement in EBIT margin es expected in FY28 as the cycle turns. To this end, operating leverage across in the Hardware division is high.

Balance Sheet Provides Scope for Further Acquisitions

As at 30 April 2026, gearing (on a net debt to EBITDA basis) was 1.0x, which was broadly stable and at the low-end of the target range (1.0x-1.75x). In context, gearing over the last two years has increased from 0.45x as at 30 April 2024, following acquisitions and higher capital expenditure (CAPEX).

The Company has substantial balance sheet flexibility to pursue further acquisitions, with ~$967m of undrawn committed debt facilities. Even a sizeable acquisition, which would lift the gearing level towards 1.4–1.6x, would still be within the target range.

In the absence of acquisitions, gearing is expected to remain around current levels, given strong cash generation and moderating CAPEX and acquisition-related spending. The expectation for gearing levels to remain around current levels also factors in dividend payments in line with the stated dividend payout ratio of 70–75%.

Fundamental View

Notwithstanding share price weakness since our recent report, we maintain the view that investor caution remains warranted. In particular, we highlight:

i. Unappealing valuation metrics. MTS shares are currently trading on a 1-year forward P/E multiple of ~12x, which is unappealing in the context of a modest EPS growth profile of +3.5% over FY26-29 on a CAGR basis.

ii. Trading conditions point to a mixed outlook. Supplier inflation implies difficulty in maintaining IGA’s price gap. Further, competitive pressure from several players, such as Bunnings, the major supermarkets and Endeavour Group (i.e. liquor) WES, WOW, COL, EDV is likely to intensify. In Hardware, trading conditions are likely to weaken due to lower housing turnover.

Charting View

MTS has been trading very poorly since peaking a year ago – the moves lower are very impulsive and it struggles to move higher on the rallies. It is finding resistance near $3.20, so unless it can break above that level, the risk remains to the downside for now.

 

Michael Gable is managing director of Fairmont Equities.

 

CLICK HERE to read our Testimonials.

Current share prices available here.

You can learn more about technical analysis in this article.

 An 8-week FREE TRIAL to The Dynamic Investor can be found HERE.

Would you like us to call you when we have a recommendation? Check out our services.

Disclaimer: The information in this article is general advice only. Read our full disclaimer HERE.

Like this article? Share it now on Facebook and X!