Sustained Momentum in Base Business: Metro Inc. (TSX: MRU) is one the Canada’s leading retailers. The company operates through a network of 950 food stores under several banners including Metro, Metro Plus, Super C, Food Basics, Adonis and Première Moisson. Investors should note that the company’s offering fall under “essential business” segment and the demand continues to sustain irrespective of the economic cycles. The stock is trading above its 200-Day Simple Moving Average (SMA) of CAD 55.38, and has been resilient to large market swings.

On April 21, 2020, MRU declared a quarterly dividend of CAD 0.225 per share, reflecting a growth of 12.5%.

Outlook: Demand is expected to remain robust in the food segment. The group mentioned that same store sale in food segment is up ~25% on annual basis. However, pharmaceutical sales are under pressure on account of lower footfall. Operating cost is expected to remain high on account of additional safety measures, maintenance and cleaning. The company would continue to run its stores, while faced delays in adapting to automated grocery distribution. The company delayed its automated distribution centre project to 2021 in order to preserve cash in the near term.

Q2FY20 Financial Highlights: For the period ended March 14, Metro Inc. reported a stellar performance with strong same-store sales growth led by increased demand. Revenue of MRU stood at CAD 3,988.9 million, up 7.8% on account of a spike in demand for its Food and Pharmacy segment owing to the COVID-19. Operating income before depreciation and amortization stood at CAD 374.1 million, as compared to CAD 256.2 million in Q2FY19. Net income soared to CAD 176.2 million, as compared to CAD 121.5 million in Q2FY19, thanks to increased operating income coupled with a drastic fall in rents and occupancy charges, which was partly offset by increased staff expense, higher depreciation, finance costs and higher income taxes.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock of MRU has generated a ~21% return during the last one year and is trading at CAD 60.02 with a market capitalization of ~CAD 15.16 billion on 22 April 2020 market close. The stock is quoting at the upper band of its 52-weeks trading range of CAD 47.88 and CAD 61.74. MRU’s second quarter benefitted from surge in demand due to the crisis. While we do not expect such spike to continue, but expect MRU to continue to benefit from sustained momentum in its base business. MRU continues to generate significant amount of cash flows and has enough liquidity to fund its operations. Given the defensive nature of its business, MRU stock is likely to remain immune to large market swings and add stability to investors’ portfolio. We recommend a ‘Hold’ on MRU stock at the closing market price of CAD 60.02 as on April 22, 2020.

MRU Daily Price Chart (Source: Thomson Reuters)

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