Metcash taps the market in $300m equity raising

Consumers have rushed to IGA grocery stores amid the COVID-19 disruptions.

Supermarket, liquor and hardware wholesaler Metcash is raising $300m through a placement at $2.80 per share.

Working on the deal is Macquarie Capital.

Metcash last traded at $3.04 and has experienced strong gains on the back of the rush to its IGA stores by consumers amid the COVID-19 disruptions.

The grocery business has entered into a trading halt for the raising to strengthen its balance sheet. The raising will be made up of an institutional placement and a share purchase plan will follow.

Metcash will be the latest corporate to tap the markets for fresh capital in the wake of the coronavirus pandemic with other companies such as Cochlear, Webjet, Auckland International Airport, QBE Insurance and Shopping Centres Australia raising billions of dollars from new and existing investors.

Metcash chief executive Jeff Adams said the COVID-19 pandemic has presented a unique set of challenges for Australian businesses, including an unprecedented level of uncertainty.

“We have responded by changing our key priorities during this period to protecting the health and wellbeing of our people; keeping our supply chains open to ensure delivery of essential goods; and protecting our balance sheet.

“All our pillars [divisions] are currently trading, although trading restrictions are impacting the Liquor Pillar and there is a minor disruption in the Hardware Pillar. We have invested in additional working capital to further support our retailers through this period, particularly in Liquor where our Australian ‘on-premise’ customers and New Zealand retail customers are currently subject to restrictions.

“Sales in the Food Pillar have been strong due to a change in consumer behavior related to the COVID-19 restrictions. We have, however, incurred higher costs to both fulfil these sales and manage higher health and safety risks,’’ he said.

In a trading update provided as part of the $330m capital raising Metcash said its flagship food and grocery business, which provides the bulk of the company’s profits, witnessed an uplift from the panic buying and stockpiling by consumers.

It said the sales trajectory before COVID-19 had continued to improve and there was a significant uplift in sales in March and early April reflecting a change in consumer behavior related to COVID-19 restrictions.

Metcash said total food sales for the five months ended March 2020 increased 4.3 per cent (up 7.6 per cent excluding Drakes). Supermarkets sales increased 4.8 per cent (up 8.9 per cent ex Drakes) over the same period, and wholesale sales excluding tobacco were up 5.5 per cent (up 9.8 per cent ex Drakes). It was a significant improvement on the 0.3 per cent decline in the first half.

Metcash’s core supermarket pillar has been under pressure for many years. Last year Metcash unveiled a grand strategy to update and overhaul of its entire operation as well as arrest the long-running earnings decline for its wholesale grocery operations. It launched a strategy in March last year which included an ambitious spending and capital expenditure plan of investing up to $270m across its three core divisions — food, hardware and liquor — over the next three to five years. This includes $90m in the first three years at its hardware operations, and around $165m over five years for its food and grocery division. This will see potential capital expenditure of $100m across key network investment, rebranding and supporting retailers with secured loans, $10m on trials of 10 small format convenience stores that could grow to 150 stores and $25m spent on improved logistics.

Those plans could now be rattled by the coronavirus pandemic and shutdowns of key parts of the economy, although for now supermarkets, hardware stores and liquor outlets are permitted to remain open.

Metcash said this morning it is unknown to what extent the recent elevated sales will continue, including once restrictions are relaxed or lifted. It said fiscal 2021 will include lower sales arising from the cessation of the Drakes South Australia supply contract on 30 September 2019, and from 7-Eleven following advice that 7-Eleven will not be renewing its current supply agreement with Metcash when it concludes on 12 August 2020 (annualised EBIT impact around $15m).

In an update today for its other key divisions, liquor and hardware, Metcash said liquor

sales growth before COVID-19 continued in the second half, with liquor sales increasing 3.2 per cent for the five months ended March 2 against a gain of 1.7 per cent for the first half of 2020.

Sales have been negatively impacted by the COVID-19 related closure of its New Zealand operations and the closure of “on-premise” businesses in Australia, Metcash said. These closures took effect in the last week of March and sales to these customers account for around 20 per cent of total liquor sales.

“The business experienced elevated sales in the Australian retail network in March/ early April, which helped partially offset the decline from ‘on-premise’ businesses and the New Zealand operations. It is unclear as to the timing of any lifting or relaxing of the COVID-19 restrictions. The business is focused on adapting to the changed external environment including accelerating the growth of its digital capability.”

At its hardware division sales declined 1.3 per cent in the five months ended March 2020 , which is an improvement on the decline in the first half of 4.2 per cent.

“In March there was an increase in demand across both the Trade and DIY segments. The increase in trade was partly attributable to pre-purchasing based on concerns about COVID-19 restrictions being introduced for hardware retailers,’’ Metcash said.

“Stronger DIY sales in March have continued into early April, particularly in the paint and garden categories.”

Metcash said hardware sales in the second half have continued to reflect the slowdown in construction activity, and there is a risk of a further decline in construction activity related to COVID-19, which is not expected until the second half of 2021.