Metro AG – Suitable Entry Point Is Now Here (MTTWF)

Dear readers/followers,

I’ve been looking at, and into Metro AG (OTCPK:MTTWF) for a few years at this point, and have consistently held a neutral “Hold” rating, which implies that I am not buying, nor believing that anyone should really “Buy” here. And as far as my coverage of the company has been here on Seeking Alpha (and it’s been over a year now), I’m the only analyst with any sort of significant coverage of Metro.

Metro AG is sort of like a Costco/Walmart in Europe, but it has stores elsewhere as well. It’s one of those businesses that has a very good business idea, even very good assets and geographical diversification, but has as of yet not managed to bring around the sort of profitability and upside that would result in me considering it a buy.

The reason for some of the uncertainty about this stock is the myriad of issues that Metro has been facing lately. It’s divested multiple assets and even segments, and has also had actual structural problems since the GFC. The Russian invasion of Ukraine also had a major impact on the company because it has operations in these geographies.

The short of it is – Metro’s problems are not easily fixable on a fundamental level. But if they do, and if we see a sort of bottom for the stock and the valuation here, the upside could be massive. Because the operations are actually good and interesting – it’s food and various consumer goods-related items.

You can find my last article on the company here.

Metro AG – Fundamentals And Upsides After 2Q Of 2024

A wholesale giant with an eye to expanding its network of multichannel/omnichannel distribution and sales. That’s what Metro can be called and characterized as. The bad part for Metro is that it has been losing market cap for over 10 years at this point. While the company hasn’t collapsed as much since my last article, we’re still down double digits and what was a €5.5/share for the native B4B ticker (great ticker, by the way), is now down to below €4.4/share for the native, and below $6/share for the ADR.

What’s the reason for this?

We’ll have the next period results soon – and this therefore acts as an earnings preview to what’s coming here. The company has, prior to this, made a few adjustments (changed the composition of its board of directors, among other things), and we do have 2Q24 results to look at to understand where the company is going from here.

Because positives do exist here. We’re seeing volume-driven growth during an inflationary period. The company’s implementation of its strategic initiatives is going according to plan.

The company was also able to confirm the overall upside for the company, as well as the current guidance for 2024E. Sales growth for 2Q was 4%, but adjusted EBITDA was down significantly due to what the company considers to be seasonal effects. In line with the company seasonality, it’s likely that we’ll see a “bounce back” for company results during the next quarter and report, coming in the next few days.

The company’s multichannel growth strategy remains the core of the business plan on a forward basis – and it’s actually working well. Why is it working well? Because KPIs are clearly showing improvements here, with growth in FSD sales, roll out of new markets, and more subscribers for the DISH service. In total, we’re talking about a 7% multichannel growth.

But more important than the current growth numbers we’re seeing here is the ongoing transformation. The company is in the midst of its sales force transformation, as well as creating new depots for the company across Europe and the Middle East/East.

The company’s FSD and Digital segments are making even further progress as well, with increasing sales shares across most of the main countries, including Germany, France and others. Store-brand or Metro-brand sales are also increasing, and now make up nearly 23% of all sales. The company’s transformation is expected to drive many of these advantages.

The company’s view is that its growth targets and ambitions are now confirmed. I would agree with this assessment and say that the company does have a non-trivial upside from these levels if the growth ambitions and company plans turn out to be realistic.

The bottom line isn’t “fixed” yet. Company KPIs are still in the negative here. FCF is negative to the tune of almost €700M, only slightly improved from the YoY period, and EPS is actually more negative than a year ago. But top line continues to grow, and net debt is down despite a slightly lower overall EBITDA.

Geographically speaking, all the company’s regions are showing good trends. Best among them is growth in Russia actually (aside from “others”, but this is an extremely small overall segment), with 13% and €545M in 2Q, and the lowest is found in the established markets of Germany and West, which is showing only 2% growth.

EPS is down seasonally for the most part, in addition to negative FX, but H1 EPS is in line with overall guidance for this year. So things aren’t as “bad” as they currently look. The company’s improved situation can be confirmed by looking at the company’s refinancing spreads and specifics. The company managed to refinance €500M at a 5-year time for a coupon of 4.625%. The company also remains IG-rated at a BBB-rating, and the company’s liquidity position is solid with an abundance of credit lines.

Here, to remind you, is the current expectation for Metro going forward in this year.

I’ve said it before, and I will say it again. This sort of turnaround is bound to take a long time. Given where the company was and where it is going, I don’t expect fast moves here – even if the company valuation can probably move fast when it is “time” for it to do so.

The company has exited both Japan and Myanmar and is exiting India. But the company is also adding new revenue streams, in the form of Günther AGM, JHB, Davigel, and Eijsink. The company is now expecting total sales of just north of €30B, with a base EBITDA on an annual basis of around €1.2B. When and if this works out, that means you’re paying a very low multiple for such an EBITDA, and this is where this investment could potentially shine.

I did not expect miracles in 3Q24. That’s why I don’t consider all the new earnings relevant to Metro’s long-term thesis. At best, I believe we’ll see a slight move in the share price, perhaps from a slight beat. But remember, we’re still in an inflationary period – so no miracles expected here, really.

3Q24 results came out as this article was being looked at, so I’m including them here as well. The company, as expected, saw continued top-line growth in all of its segments and channels, coming to a 3.4% sales growth to around €8B for the quarter, or around a run rate of €32B annually. However, the overall basic thesis and trends did not change.

We see this as we look at the company’s EBITDA, which was down (if only slightly). We also have more inflation, volatility, and issues in Russia than expected, which are likely to weigh on full-year results. So the company is showing continued positive sales, but sales were never the problem for Metro AG. The issue has been profit. Also, Germany and Segment West actually saw a sales decline of below 1%, and Germany at 2.4% decline. The issues in Russia we can also see when comparing top and bottom-line results. Because sales in Russia were actually up over 12%, but profit was still down. I make no adjustments to my forecasts or models, apart from a slight impact for Russia – but this does not change my full-year forecasts materially.

3Q24 has, as such, only confirmed my thesis and expectations for this company, and the valuation considerations for this company are still very much on point.

Metro AG – Upside Is Here, I Just Want The Company At A Cheap Enough Price

In my last article, I moved to a €5/share price, which is what we’re having here today. So the first question that needs answering is whether the company, which now is below €5/share, can be considered a “Buy” at this time.

Yes, I believe the time has now come where Metro AG can, due to valuation, be considered a “Spec Buy”.

As of this article, I’m going to add a speculative stake in Metro AG to my portfolio. This doesn’t mean that Metro AG is an “easy investment” or an easy value play. It’s a long-term turnaround – of that there is no doubt in my mind. The upside for the company in the longer term is significant, though, and I do believe here that we’re now being “paid” well enough for the risk we’re taking when investing in the company.

The yield is only a small part of why I am interested here. The fundamental reason is simply because I view Metro AG as being worth more than the market is currently pricing it at. Remember that the expectation is for Metro AG to currently decline over 80% in adjusted EPS for this year (Source: Paywalled FAST Graphs Link)

But at the same time, I see the upsides in the quarterly reports as strong enough here to make the company certainly interesting. I did not buy at below €4/share, the company actually dropped to below €4/share for a short time. But I missed that, unfortunately. I’m instead investing at around €4.3/share, which I still believe to be good enough to make it interesting.

At this price, we’re talking about investing at a revenue multiple of 0.16x, an EBITDA multiple of less than 4.4x, and an FCF multiple of 10x. Street targets for Metro AG are well above the current level, with an average of €5.75 from a low of €4 and a high of €10/share. Most analysts are at a somewhat dubious stance for the company here despite this, and cannot really be blamed for this given the number of negative years we have behind us with this investment.

However, at under €4.4/share, and under €5/share which was my previous PT, I now believe that this company constitutes a “Buy”.

Here are the risks for the company as I currently see them.

Risks For Metro

The risks to Metro are not valuation-based any longer – the company is cheap enough now for this not to be a concern. Instead, the main risk/s are related to the amount of time for the potential turnaround. That there will be a turnaround is something I consider to be very likely, but the timing of it, that’s somewhat in question here. 2 years? 5 years? I don’t think that it will be this year, and there could be further “roadblocks” ahead as well, which impact how quickly this turnaround could happen.

In the end, though, these are the risks to Metro AG. That, and of course, the company’s continued exposure in Russia and the like.

Beyond that, here is my current thesis for Metro AG.

Thesis

• Metro AG is not an uninteresting stock, but it’s one that requires a fair bit of consideration and discounting before you even consider going into it, even now that it’s considered a “Spec Buy” by me. It’s a near-unprofitable wholesale hypermarket with interesting geographical exposure, but with many growth-related challenges from operating in multiple markets. Oh, and it’s still active, and with the full intention of staying active in Russia despite the multitude of sanctions towards the nation.
• These facts make the company a complex investment at best. I would discount Metro AG very heavily based on these facts. The company currently trades at just north of €4/share, and this is where I consider the fair value to be relevant and a “Buy” able to be done.
• I would estimate Metro AG to be an interesting play at around €5/share, which makes this company a “Buy” here. I am now adding shares of Metro AG to my portfolio.

Remember, I’m all about:

1. Buying undervalued – even if that undervaluation is slight, and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn’t go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansions/reversions.

The company fulfills four of my criteria, making it clear why I view it as a potential “Spec Buy” here.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.