Metcash to book $352 million impairment on grocery weakness

IGA-exteriorGrocery wholesaler Metcash will book a $352 million impairment on its goodwill and other assets in its supermarkets and convenience pillar after losing its biggest customer in South Australia.

The company said on Wednesday that ongoing competitive intensity in the grocery sector and weakness in the West Australian economy were also to blame for $318 million in goodwill and $34 million in other asset impairments.

It comes after Drakes Supermarkets, one of Metcash’s largest clients, refused to play ball with a new distribution centre being set up in South Australia, putting the business out of a lucrative $270 million per year supply contract with the chain.

Drakes has yet to commit to a supply arrangement with Metcash in South Australia after its current one expires in June 2019.

The 50-store chain has opted to set up its own DC in the state to provide what it believes will be a superior outcome for its business and customers.

Analysts also believe that three other Metcash supply contracts are at risk as the wholesaler confronts broader challenges to its business model.

Metcash said on Wednesday that the non-cash impairments would not impact its debt facilities, compliance with banking covenants or ability to undertake capital management initiatives.

Metcash shares sank 2.8 per cent in early Wednesday trading to $2.76 and have now fallen 25 per cent in the last fortnight.

Citi analysts Bryan Raymond and Craig Woolford said last week that there is a risk Metcash could lose up to three more contracts up for renegotiation in the next twelve months.

That could drive its share price down another 20 – 30 per cent to as low as $2.18, they said.

Metcash, which supplies most of Australia’s IGA supermarket network, dashed any hopes that its supermarket and convenience division would return to growth in FY18 last week, warning of further decline.

The division is expected to post a 1.2 per cent decline in total sales in FY18, while its wholesale business (excluding tobacco) is slated to fall 3.6 per cent.

Wholesale sales declined 4.3 per cent in FY17, while its supermarkets and convenience business posted a 0.6 per cent increase in sales to $9.1 billion.

FY18 earnings for supermarkets and convenience are expected to be in line with last year’s EBIT result, which was up just 0.05 per cent to $180 million.

Metcash’s IGA network is facing structural challenges as the major supermarket chains continue to put pressure on margins to compete with discounters like Aldi.

It is expected that intensifying competition in fresh categories will see IGA businesses lose further share in the fruit, grocery and meat categories in the coming years.

The impairment will be booked as a significant item in Metcash’s full year result, due to be released on 25 June.

More to come.

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