The automotive industry is still moving along in parts and servicing, which will always be in demand regardless of whether less cars are manufactured in Australia or not. We love our cars and our day-to-day need for them makes the services, repairs and accessories purchases a necessity.
Metcash Limited (ASX: MTS) announced last week that it acquired the Midas Australia auto parts and services company made up of 88 centres nationwide. This goes along with its current nine auto parts and services businesses such as Autobarn and Autopro.
Metcash is the wholesale operator of IGA Supermarkets, short for "Independent Grocers of Australia". Its local grocer style food retailing competes with the larger and more extensive store chain giants Woolworths Limited (ASX: WOW) and Wesfarmers Limited (ASX: WES).
The company's auto related businesses are more in competition with Super Retail Group Ltd (ASX: SUL), owner of Supercheap Auto, and recently ASX-listed Bursons Group Ltd (ASX: BAP), which operates Bursons Auto Parts.
What does Metcash have going for it and what can investors look forward to?
1- It is starting a transformation program that will improve its supply chain, expecting to reduce costs and improve customer service. It will provide better support for its network of independent retailers.
2- To help fund the capex needed for the transformation program, the company proposes reducing its dividend payout ratio to 60%, starting from the final FY2014 dividend. Its previous payout ratio has been 74%-90%, but by ploughing back more money into the business, the benefits will come from potentially higher future earnings.
3- Annual underlying net profit generally has risen every year since 2004, especially in 2012 when it had a bigger jump in earnings than regular, making 2013's underlying net profit seem like a down year.
The company is forecasting a drop in earnings per share for FY2014. The transformation program is being implemented to turn this around, yet will take some time.
Reported net profit has been up and down over the last several years, which has put off investors. Long-term investors should see past that and focus on the growing earnings trend. A turnaround in earnings and share price could arise after the transformation program has made progress.
It may not overtake Wesfarmers and Woolworths in business size, but it can grow and expand in businesses that aren't in direct competition with them. It can play to its strengths and add to its growing automotive care business.
