Metro Inc.

Metro Inc. (TSX: MRU) is a Canada-based company engaged in the food and pharmaceutical industry. The Company portraits a retailer, franchisor or distributor's role under various grocery banners in the conventional supermarket and discount segments.

Key highlights

• Growing Same-store Sales: In Q1 2021, the Company registered growth in all the segments through same-store sales except the pharma sector, where sales were down 0.8%. Food same-store sales were up 5.5% and up 10.1% for the first ten weeks of the quarter. Online food sales are up 240% versus last year. Group’s food basket inflation was flat at 2%, against 2% compared to the previous year. Pharmacy same-store sales were down 0.8%, with a 4.2% increase in prescription drugs and a 10.5% decrease in front-store sales.

• Industry beating margins: Despite the second wave of the COVID-19 Pandemic, the Company maintained its pace and witnessed spirited performance across its EBITDA margin, operating margin and net margin along with ROE. In addition, the management’s solid determination helped them leap the industry median margins on many fronts in Q2 2021, which is a key positive. The chart below gives a glimpse of this. 

• Stable cash from operating activities: In Q2 2021, operating activities generated cash inflows of CAD 416.9 million compared with CAD 465.4 million in the corresponding previous period. While for the first half of 2021, operating activities generated cash inflows of CAD 650.3 million compared with CAD 544.9 million for the corresponding period of 2020.

Financial overview of Q2 2021 (In Millions of CAD)

Source: Company 

• In Q2 2021, the company posted sales of CAD 4,193 million, which increased by 5.1% compared to CAD 3,988.9 million in the previous corresponding period. The increase was primarily due to growth in same-store sales in all the segments, partially offset by the pharma segment.

• Operating income before depreciation and amortization in Q2 2021 stood at CAD 396.1 million, or 9.4% of sales, increased 5.9%, against CAD 374.1 million in the previous corresponding period.

• In Q2 2021, the company reported net earnings of CAD 188.1 million against CAD 176.2 million in the previous corresponding period. The increase was primarily due to high revenue, partially offset by growth in depreciation cost.
  

Risks associated with investment

The COVID-19 pandemic still clouds the Company's near-term outlook. While the Company foresees revenue to remain above average through this pandemic's duration based on its role as an essential service offering, there is downside risk to this outlook related to increased outbreaks of COVID-19 and potentially severe economic challenges. 

Valuation Methodology (Illustrative): Price to Earnings

Stock recommendation

The company is rigorously applying the government's measures to reduce the effects of the pandemic and remain agile as it evolves. It is also working with the government authorities to speed up vaccination efforts through its pharmacies' network and expect its front-end sales to boost in the short term. For FY21, the company expects to maintain the growth momentum within the prescription drugs segment, while the food segment would remain strong, which is likely to drive revenue. The company has been able to strategize as per the consumers' changing preference, offered online service to the consumers, and reported solid growth from the segment in the recent past. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 58.40 on June 04, 2021. We have considered Dollarama Inc, Alimentation Couche-Tard Inc, Saputo Inc, etc. as the peer group for the comparison.

One-Year Technical Price Chart (as on June 04, 2021). Analysis by Kalkine Group 

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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