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Wednesday 17

October, 2018 5:12 PM



Contract worries pressure Metcash shares

Contract worries pressure Metcash shares

The Drakes Supermarket agreement could be the first of several major contracts that Metcash could lose, Citi analysts have warned.

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By AAP 31.05.2018 02:57 PM

Shares in Metcash continue to slide amid fears the IGA and Foodland supermarkets supplier could lose more contracts with its independent retailers.

Metcash shares have plunged 21 per cent in the past four days after the grocery supplier flagged on Monday a potential $270 million sales hit if it loses a contract with independent chain Drakes Supermarkets.

Drakes Supermarkets, which has more than 50 stores across South Australia and Queensland, will not commit to Metcash beyond the end of the parties' current South Australian agreement in June 2019.

Citi analysts Bryan Raymond and Craig Woolford say there is a risk Metcash could lose up to three more contracts which are also up for renegotiation over the next 12 months.

"The direct impact of losing the Drakes South Australia contract for 39 supermarkets is manageable for Metcash," the Citi team said in a research note.

"The risk is high, however, that the Drakes agreement could be the first of several major contracts which could be lost or renegotiated with a significant deterioration in terms for Metcash."

Citi warns that if Metcash were to lose one or two of the contracts up for renegotiation, its share price could fall another 20 to 30 per cent to as low as $2.18.

Metcash's shares were three cents, or one per cent, weaker at $2.88 at 1455 AEST on Thursday, down from $3.12 at the start of the year.

Morningstar retail analyst Johannes Faul said Drakes accounts for about three per cent of Metcash's food sales and two per cent of total group revenue.

Mr Faul said Drakes' unwillingness to commit to a long-term supply agreement highlights the risk to Metcash's share of the $80 billion-plus grocery market which is already under pressure from lower prices from Woolworths, Coles and the ongoing expansion of Aldi into South Australia.

Metcash said on Monday it is seeking approval for a new distribution centre in SA, but that Drakes Supermarkets will not commit to Metcash beyond the end of the parties' current SA agreement.

Total sales, including tobacco, to Drakes Supermarkets in SA were about $270 million in the 12 months to April 30.

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