Income Report / Income Note: Why we like Metcash (MTS, CLW)

By Market Matters 09 December 20

Income Note: Why we like Metcash (MTS, CLW)

Market Matters Income Report 9th December 2020

The ASX has followed overnight markets higher this morning with Real Estate the only sector to see a fall. Selling has been focussed here on the back of two capital raises this week as fundies look to cover allocations in Abacus Property Group (ABP) and Charter Hall Long WALE REIT (CLW) which are looking to raise a combined $650m. Equities continue to be supported by the hope of more stimulus out of the US as well as the first vaccine injections outside of trials.

We’re seeing strong outperformance by Commonwealth Bank (CBA) again today, the stock trading 2% higher at $83.47 while NRW Holdings (NWH) has cracked the $3 mark on a positive update from a customer –we remain bullish on both stocks

Overall, the ASX 200 is currently trading up +44pts / 0.66% to 6731

ASX 200 Chart

The Income portfolio climbed by 1.41% in the week performing in line with the broader equity market despite the weighting to income securities – exactly what we want to be seeing! Performance was led by the 11% weighting to iron ore names BHP (+9.5%) and RIO (11.7%), while dividends were paid by the three hybrid securities in the portfolio – AMPPB, CBAPG & NABPF. The portfolio remains well ahead of its benchmark for the current financial year, up 14.35% vs the RBA + 4% target of 1.85%. Since inception the portfolio has done 6.50% p.a.

Why we like Metcash

1 Metcash (MTS) $3.46

We’ve talked about Metcash over the last couple of days after they reported strong 1H21 earnings. With an estimated P/E of 16x, which is around 10 P/E points cheaper than larger dominate rivals Coles & Woolies and a yield of 5%, despite its 20% rally so far in December, we see further upside in the stock based on 3 key factors:

  1. In September they completed the acquisition of 70% of Total Tools Holding which is the franchisor of the Total Tools Network which is a specialist tool retailer. While only a small acquisition ($57m) they will grow this over time and it continues a decent (and successful push) into hardware through its Independent Hardware Group (IHG). IHG includes brands such as Mitre 10, Home Timber & Hardware, Thrifty-Link Hardware, True Value Hardware and Hardings. The hardware division was the area of surprise on the upside in this weeks update and the momentum is strong.
  2. Convenience shopping is a growth area in our view and Metcash is the wholesaler to many leading convenience stores. As online shopping from bigger franchises gains more traction thanks to Covid, mid-week ‘top ups’ place a higher degree of importance on convenience locations which is key to Metcash. They’ve refurbished around 40% of their grocery network with more work to do and while I’m clearly biased given the IGA at Balgowlah Heights is my go-to, I can see real upside in their local footprint.
  3. Metcash has been the poor cousin of the majors for as long as I can remember, however they now have a very strong balance sheet, a growing business that is improving incrementally in all areas, and they’re too cheap in MM’s view. That balance sheet capacity should also bring in further thoughts of capital management initiatives at their full year results.

MM is bullish MTS for income  

Metcash (MTS) Chart

2 Dalrymple Bay Coal Terminal (DBI) $2.16

DBI listed on the ASX yesterday and was down on day one by 15%. The largest coal terminal in QLD raised $1.3bn in the year’s biggest raise. A few things have changed since the listing was pitched at $2.57 per share. The market had it’s best November, so risk on (rather than defence) is the flavour of the day while tensions between China and Australia have not helped. The other aspect here is around rising bond yields which is a negative for these sort of infrastructure assets.

On the positive side, most of the focus has been on the 7% yield however that’s a bi-product of earnings, which are stable and have a path for growth over the coming years. They currently have annual export capacity of about 85 million tonnes of coal a year having handled around 15% of global metallurgical coal (used in steel making) exports in 2019. This tonnage is fully contracted undertake-or-pay contracts until mid-2028. They also have the capacity to grow this tonnage further and that underpins higher earnings and higher dividends moving forward.

Around $2.20, MM is bullish DBI despite it’s weak start to listed life.

3 Charter Hall Long Wale REIT (CLW) $4.81

The property operator was today earmarked for the chopping block from the MM Income Portfolio to make room for the purchase of Metcash (MTS), but alas, they went into a trading halt this morning to raise $250m through an institutional placement at $4.65, a 3.3% discount to last. We’ll now have to hold fire on that sale until this raise washes through. We’re in no great rush to sell it, however we are very low on cash in this portfolio.

The equity raise is to fund the purchase of 3 good properties. 76-78 Pitt Street in Sydney via a sale and leaseback to Telstra (TLS) for $280m, a new Bunnings property to be developed in Caboolture for $28m + they bought a 49.9% interest in a pub in Darwin for ~$10m.

We’ll now need to show some patience in CLW

Charter Hall Long Wale REIT (CLW) Chart


MM are buying Metcash (MTS), we like DBI & we’re now holding CLW while the equity issuance washes through.

Have a great day!

James, Harry & the Market Matters Team


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