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Metcash takes $352m hit as supermarket pulls out

AAP  |  06 Jun 2018Text size  Decrease  Increase  |  
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Metcash will record a $352 million impairment in its full-year results after a South Australian supermarket decided not to renew its contract.

Metcash (ASX: MTS), which currently supplies to IGA and Foodland supermarkets, lost a customer in Drakes Supermarkets, a grocery retailer with over fifty stores across Queensland and South Australia.

Metcash said last week that Drakes Supermarkets would not sign up in South Australia beyond June next year, but only outlined the size of the impact on the carrying value of goodwill today.

Shares in Metcash fell as much as 12 cents, or 4.3 per cent, to an eight-month low of $2.64.

Metcash will post a $318 million non-cash impairment against goodwill and other intangibles, plus a $34 million asset write-down, when it announces its results on June 25.

Morningstar equities analyst Johannes Faul says that Drakes' departure, as well as continuing company weakness in Western Australia are, at least partially, symptoms of the aggressive competition across the sector.

"The increased competition is here to stay, and we expect Metcash’s IGA network, and to a lesser degree Coles and Woolworths, to continue losing market share to Aldi over the next three years," Faul says.

"Further, softer housing prices and higher fuel costs are checking retail spending near term and driving consumers to discounters such as Aldi."

The impairment is more than Metcash made in the whole of the 2017 financial year. The company last year reported a 20.6 per cent fall in full-year net profit to $171.9 million and flagged continued pressure on food sales amid tough market conditions.

Metcash said last week Drakes would not commit beyond the end of the parties' current South Australia agreement despite the supplier's plans for a new distribution centre.

Total sales, including tobacco, to Drakes Supermarkets in SA were about $270 million in the 12 months to April 30.

Morningstar's fair value estimate remains unchanged at $2.40. 

More to come.

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Emma Rapaport is a reporter for Morningstar Australia.

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