MoneyTalks: 29 Metals is out of the woods when copper price rises; and Metcash rated Overweight

Jarden Australia has sent research notes on two ASX stocks
Metcash to grow earnings until FY25, rated Overweight
Copper producer 29 Metals could be out of the woods if copper price rises

Metcash’s acquisitions support its Overweight rating

Jarden Australia says it remains positive on Metcash (ASX:MTS) and rates the stock an Overweight, with a target price of $4.30 (versus current price of $3.71).

Metcash is a wholesaler and conglomerate company that distributes food, liquor and hardware. The company is headquartered in Macquarie Park, NSW.

In the food segment, Metcash is the largest supplier to independent supermarkets in Australia with the widest distribution network.

Jarden believes the market continues to value MTS as a structurally challenged food wholesaler. But that will change as earnings from food and the higher margin hardware business could grow all the way into FY25, says Jarden.

“The key risk we see to this view is that food share loss accelerates faster, which the trading update does not suggest, or that hardware earnings are materially impacted from a housing cycle (no evidence to date),” said the note from Jarden.

Last week, Metcash announced three acquisitions for a combined $560 million, calling it a long-term play aimed at bolstering its food distribution and hardware operations.

The company acquired Superior Food Group, Bianco Construction Supplies and framing and truss operator Alpine Truss.

Metcash is currently completing a $325m cap raise to fund these acquisitions.

“We see strategic sense in all three, with clear synergies,” said Jarden.

According to the broker, synergies that will be gained include significant scale benefits through sourcing, and expansion of category lines such as own brand.

“In our view, the last-mile and warehousing capability of Superior Foods provides scope to win and expand across a raft of new customers, particularly convenience and QSR (quick service restaurant).

“There will be organic growth through opening up new contract opportunities across wholesale and trade that might not have previously been open,” said Jarden.

In its release to the ASX, MTS has also highlighted its history of exceeding synergy targets.

“We retain our Overweight rating with MTS’s multiple set to expand as it demonstrates sustainable, defensive growth…” said Jarden.

“We continue to see MTS’s valuation as undemanding, with the implied 4x EV/EBIT multiple at the raise price too low in our view.

“Key risks include price competition, market share loss and a housing slowdown,” noted Jarden.

Is 29 Metals out of the woods?

Jarden also has an Overweight rating on 29 Metals (ASX:29M), with a price target of 39c (versus current price of 25c).

29Metals is a copper producer and precious metals explorer with assets in Australia and Chile. The company’s Golden Grove mine in WA is said to be a world class VHMS geological system.

Jarden says it remains of the view that the company’s cost base is simply too high.

“It is increasingly apparent to us that 29M requires a Copper (Cu) price of >US$4.00/lb to continue as a going concern,” said Jarden.

“29M desperately needs to reduce costs, at both mine sites and head office, to minimise cash outflow during a period of elevated permitting risk.”

At current spot prices, Jarden believes CY24 cash outflow would consume the entire current cash balance of $162m.

“Accordingly, it is our view that, the longer Cu (~US$3.80/lb) and Zn (~US$1.10/lb) prices remain at current levels, the more likely it is that 29M will require additional funding to remain solvent.

“We recognise that further insurance proceeds and/or a restructure of existing debt facilities, potentially associated with an offtake finance facility, may enhance liquidity. In the absence of such solutions, or higher commodity prices, additional equity funding may be required.”

Despite the difficult backdrop, Jarden says it retains an Overweight rating on 29M.

“Our simple view is that the fundamental value of the assets is significantly higher than the market is prepared to ascribe value for at this time, given concerns about the high cost base (and ensuing lack of free cash flow generation), and deteriorating balance sheet. The key risk is a lack of liquidity.

“Our commodity price forecasts are currently constructive for both copper and zinc.

“We forecast an appreciating Cu price throughout CY24 and CY25 to average US$4.06/lb for CY24 and US$4.38/lb for CY25 (versus spot of ~US$3.81/lb).

“Similarly, for zinc, we forecast appreciation through CY24 and CY25 to average US$1.29/lb in CY24 and US$1.40/lb in CY25 (versus spot of ~US$1.11/lb),” said Jarden.