The Metcash Limited (ASX: MTS) share price is rebounding on Wednesday after dropping lower yesterday.
In morning trade, the wholesale distributor’s shares are up almost 3% to $3.48.
Why is the Metcash share price pushing higher today?
Today’s gain appears to have been driven by a positive reaction to its strategy update by analysts at Goldman Sachs.
According to the note, the broker has retained its buy rating and lifted its price target on Metcash’s shares to $4.03.
Based on the current Metcash share price, this price target implies potential upside of almost 16% over the next 12 months. And if you include dividends, the potential return stretches to over 21%.
What did Goldman say?
Goldman was pleased with its strategy update and believes the market’s negative reaction to it yesterday was wrong. It explained:
“MTS has delivered its latest strategy update, highlighting a shift in the company’s strategy to a growth footing but also flagging the business’ strong capital position by increasing its guidance for dividend payout ratio at the same time.”
“The market’s first impression was taken negatively, likely due to a lack of capital management and the higher than expected capex program.”
“However, there are a number of positives we think are important from this update: (a) management are increasingly confident in the underlying earnings stability of the divisions, (b) the positive demand profile for the housing sector is being addressed with an increased capex allocation to drive store growth in Hardware, (c) the newly acquired Total Tools acquisition is being positioned to take advantage of the strong demand profile from the housing cycle and growth of the format with a significant store expansion program and JV investment.”
In addition to this, the broker was pleased to see the company revise its dividend policy favourably. It now has a payout ratio of 70%, up from 60% previously. Goldman feels this is a sign that management and the board have confidence in its prospects.
All in all, with the Metcash share price trading at just 12x estimated FY 2021 earnings, the broker sees plenty of value in its shares today. This could make it one for investors to consider.
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More reading
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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