Metcash Ltd (ASX: MTS) – Well Placed for the Hardware Cycle to Turn
Metcash (ASX: MTS) is Australia’s leading wholesale distributor across grocery, hardware and liquor, trading at an 11.5x forward PE that represents a 28% discount to the ASX200. The hardware cycle is positioned to turn as rate cuts flow through from early 2027, and the margin leverage sitting within IHG’s owned store network is materially underappreciated by the market. With a 6%+ dividend yield providing downside support and the business mix shifting toward higher-growth segments like Total Tools and Superior Foods, we see an asymmetric risk-reward setup at current levels. The 12-month price target of A$3.80 implies 32% upside.
Research published 24 March 2026. Price target and upside based on prices at time of publication.
About Metcash
Metcash Ltd (ASX: MTS) is Australia’s leading wholesale distribution and marketing company, operating across three core pillars that underpin the country’s independent retail landscape. The Food division provides wholesale grocery distribution to independent retailers including IGA, the Hardware division encompasses the Independent Hardware Group (IHG) with brands like Mitre 10 and Home Hardware alongside the Total Tools franchise, and the Liquor division handles wholesale distribution and retail operations. Headquartered in Sydney and listed on the ASX with a market capitalisation of approximately A$3.2 billion and an enterprise value of A$5.0 billion, Metcash supplies thousands of independent retailers across the country. The recent acquisition of Superior Food has added a meaningful growth engine to the food business.
Why We Like MTS at Current Levels
Metcash has had a rough stretch. The stock has underperformed the ASX200 by around 23% since mid-December, largely driven by fears around rate hikes and a string of negative data points across its key divisions. At A$2.87, the stock is trading on roughly 11.5x FY27 earnings, which represents a 28% discount to the ASX200 versus its long-term average discount of 21%. We think that level of pessimism is overdone and that MTS is offering a genuine entry point for patient investors willing to look through near-term noise toward a hardware cycle recovery and an evolving business mix.
The 12-month price target sits at A$3.80, implying 32% upside from current levels. That target is derived from a blend of DCF analysis at A$4.40 per share and a 13x P/E multiple applied to FY27 earnings at A$3.20. We find that framework reasonable given the company’s long-term average P/E sits at 13x and the stock is currently well below that at 11x.
The Hardware Cycle is the Key Swing Factor
This is where the thesis gets interesting. IHG Trade like-for-like sales have been negative through FY24 and FY25, and the first half of FY26 showed only modest improvement at 2.3%. Trade activity is highly cyclical and closely correlated with dwellings under construction, which have been in a trough. However, rate cuts are expected to begin filtering through in early to mid 2027 (25bps each in February, May and August 2027), and that should provide a meaningful tailwind to the construction pipeline and, by extension, IHG’s Trade business into FY28.
What the market seems to be missing is the margin leverage sitting within IHG. Metcash now owns 157 banner stores, representing 26% of the IHG network, a substantial increase from just 53 stores (7%) back in FY16. Those owned stores generate approximately 60% of IHG’s EBIT. The current EBIT margin on owned stores sits at around 3.7%, but mid-cycle margins should reach at least 6%. For context, consider where peers operate:
- Bunnings at a 12.6% EBIT margin
- Alpine at approximately 23%
- Bianco at around 9%
There is clearly significant headroom, and the combination of greater owned-store exposure, depressed frame and truss volumes (highly cyclical), and the benefits flowing from the IHG and Total Tools merger should drive a meaningful recovery when the cycle turns. MTS now owns 14 frame and truss plants, up from just 2 in FY16, giving the company direct exposure to what is currently the most depressed segment of the hardware market. Total Tools itself continues to expand, growing from 584 stores in FY25 to an estimated 725 in FY26, with a steady rollout of around 8 new stores per year thereafter. We expect this business to contribute roughly 15% of group EBIT by FY27.
The National Housing Accord has set an ambitious target of building 1.2 million new homes over five years to FY29. Current results and forecasts suggest a significant shortfall versus this target (around 240,000 homes per annum, equivalent to peak 2016 outcomes), but even a partial catch-up in construction activity would be materially positive for IHG Trade sales.
A Shifting Business Mix That Deserves a Re-Rating
One of the most underappreciated aspects of the Metcash story is how much the business composition has changed over the past decade. Back in FY17, the Food division accounted for around 62% of group EBIT and Hardware was just 16%. By FY27, we expect Hardware to represent about 35% of group EBIT, with higher-quality structural growth businesses like Superior Foods (around 9% of EBIT) and Total Tools (around 15% of EBIT) collectively contributing roughly 24% of group earnings. The more challenged Supermarkets business will have shrunk to about 38% of the mix.
That shift matters for valuation. A business earning a larger share of profits from growing, higher-margin segments like Total Tools and Superior Foods should trade at a higher multiple than a pure wholesale grocery distributor. We think the market is still pricing MTS as the old Metcash rather than what it is becoming.
Food Division Steady Despite Headwinds
The Food division remains the largest contributor and is performing respectably given the competitive environment. Supermarkets ex-Tobacco grew 2.7% in the first half of FY26, though that pace is expected to moderate to around 2.1% in the second half as Woolworths and Coles continue gaining market share from independents. Tobacco continues to be a drag, down 35.1% in the first half, but this is well understood by the market and largely priced in.
The bright spots within Food are worth noting:
- Superior Food is growing at 27.9% and delivering meaningful synergies, with A$15m in identified synergies ramping from 20% realisation in FY25 to full run-rate by FY27
- Campbells and Convenience is growing at 14.0%, benefiting from BP contract acceleration from mid-December and the Ampol contract lapsing from February 2025
- A retail media opportunity worth an estimated A$30m by FY29, adding around 8 basis points of margin annually
Divisional EBIT is actually expected to grow from A$210m in FY25 to A$248m in FY26, largely on the back of Superior Food contributions and synergy realisation. That is a solid result in a market where grocery spending growth is slowing broadly.
Liquor Remains the Weakest Link
We are less enthusiastic about the Liquor division. Competitive intensity remains elevated, and the broader industry is under pressure, as evidenced by Endeavour Group and Coles Liquor both reporting sharp EBIT declines in their recent December half results (down roughly 12% and 37% respectively). Metcash’s Liquor EBIT is expected to decline from A$104m in FY25 to A$97m in FY26 and further to A$93m in FY27. The acquisition of Steve’s Liquor warehouse in mid-October provides a small tailwind of around 0.5%, but it is not enough to offset the structural margin pressure.
That said, Liquor is becoming a smaller part of the overall business, and we think the market understands this division’s challenges. It is not a reason to avoid the stock, just a segment that needs to be sized appropriately in any assessment of the company.
Financials and Dividend
The group-level financials paint a picture of a business navigating a trough before returning to growth:
- Group revenue dips slightly from A$19.5bn in FY25 to A$19.4bn in FY26 before recovering to A$20.4bn by FY28
- EBITDA grows from A$748m in FY25 to A$882m in FY28
- NPAT troughs at A$260m in FY26 before recovering to A$333m by FY28
- EPS follows a similar path, declining to A$0.24 in FY26 then recovering to A$0.30 in FY28
- Net debt sits at a manageable 2.4x EBITDA, improving to 2.2x by FY28
- ROE improves from 15.6% in FY26 to 18.2% by FY28 as earnings recover
The dividend profile is attractive for income-focused investors. The FY25 yield sits at 6.4%, dipping to 5.8% in FY26 before rising to 7.4% by FY28 as the earnings recovery takes hold. Free cash flow generation remains healthy at over A$330m per year across the forecast period, comfortably supporting the payout ratio of around 70% and leaving room for continued investment in the hardware and food growth engines.
Valuation
On valuation, we think the current 11x forward P/E looks compelling against the company’s long-term average of 13x and the improving business mix. The stock is trading near record discount levels relative to Wesfarmers and Woolworths, which feels excessive given the hardware cycle upside and growing contributions from Total Tools and Superior Foods. Institutional research from Goldman Sachs supports the Buy rating with a blended valuation framework, and we agree with the view that the earnings risk is now priced in at these levels. Near-term estimates sit around 7-8% below consensus for the second half of FY26 and FY27, but the FY28 outlook is roughly 5% ahead of consensus, which is where the real value sits for investors willing to look through the trough.
Key Risks
The most significant risk is a delay in rate cuts pushing out the hardware cycle recovery, which is central to the bull case. If construction activity stays depressed for longer than expected, the IHG margin recovery will take longer to materialise. Continued market share losses in Food to Woolworths and Coles remain a structural concern for the independent grocery channel, and the Liquor division faces ongoing competitive headwinds that show no signs of abating. Execution risk around the Superior Food integration and the Total Tools merger also warrants monitoring.
Our View
Metcash is not a table-pounding growth story, but we think it represents a genuine value opportunity at current levels. The stock is priced for a lot of bad news that has already been delivered, the business mix is shifting toward higher-quality segments, and the hardware cycle will eventually turn. At a 28% discount to the broader market on depressed earnings, with a 6%+ dividend yield providing downside support, we see an asymmetric risk-reward setup for investors with a 12 to 18 month horizon.
If you would like to discuss Metcash or how it might fit within your portfolio, request a callback or call us on 1300 889 603.
