-Reduced tailwind from local shopping focus
-IGA network stable and competition rational
-Trend in DIY hardware expected to continue
As
In FY21 the company will also cycle a previously negative year, given the impact of bushfires on regional stores where the company's IGA supermarket network prevails. Food sales grew 9.5% in the first half, with growth in both transactions and basket sizes. The earnings (EBIT) margin for supermarkets improved to 2.1% because of leverage from higher volumes.
Liquor sales were up 14.3% as the demand from retail outlets more than offset the restrictions placed on pubs and bars. Underlying wholesale food sales ex-tobacco increased by 16.3% with underlying earnings up 39%. Hardware sales were up 20.6%.
Macquarie notes cash flow was extremely strong in the first half, at
A moderation in food sales in November and into December probably signals the end of large market share gains for independent grocers and Citi suspects moderation is occurring faster than the broader market, amid a reduced tailwind from the focus on local shopping.
Credit Suisse agrees sales growth has now decelerated from the above-trend rate that was experienced in the first half yet there is a strong likelihood that food sales for
The IGA store network appears to be stabilising and refurbishments - and the resultant positive customer response - are likely to continue because of tax incentives. The food distribution business is also now more sustainable. In liquor the network is growing and the broker suggests the company's position is under-appreciated, with a clear store network advantage in convenience liquor.
Hardware
The trend to DIY in hardware is also expected to endure and trade momentum should improve with the government's HomeBuilder incentives. Citi observes hardware is now the medium-term growth driver, facilitated by the Total Tools acquisition (70%).
The broker estimates a fully consolidated Total Tools will contribute earnings of
On Citi's estimates,
Credit Suisse, too, has no doubt Total Tools benefitted from a high level of expenditure on tools during the pandemic. Hardware Click & Deliver has been added to
Capital Returns?
The broker also considers it likely capital returns can be delivered, given around
More than 80 basis points growth in market share occurred during the pandemic and
That said, there is competition from the shift to online as well as the bigger supermarkets rolling out "local" stores. The independent sector has acknowledged a need to catch up in online food sales.
Despite category and company-specific benefits from the pandemic and further diversification in hardware, as well as a strong balance sheet,
FNArena's database has four Buy ratings and two Hold. The consensus target is
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