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27.01.2012 Metro Finds Cheap Not Enough as Investors Press Chief to Define Strategy

When Metro AG (MEO) <http://www.bloomberg.com/apps/quote?ticker=MEO:GR> (MEO) Chief Executive Officer Olaf Koch halted talks to sell the Kaufhof department-store chain this month, he did little to persuade investors they should buy a stock that’s as cheap as it’s been in three years.

Metro shares <http://www.bloomberg.com/apps/quote?ticker=MEO9:GY> fell 48 percent last year, the second-worst <http://www.bloomberg.com/apps/quote?ticker=DAX:IND> performance in Germany’s benchmark DAX Index (DAX) <http://www.bloomberg.com/apps/quote?ticker=DAX:IND> , and trade at 9.7 times reported earnings, the least expensive since March 2009 and below an average of 14.2 for retailers in the Stoxx Europe 600 Index. The valuation alone won’t be enough to win back investors, said Mark Josefson, an analyst at Silvia Quandt Research GmbH in Frankfurt.

“Metro’s story is lacking the sex appeal it had prior to Christmas with the Kaufhof sale put on ice,” Josefson said.“It’s difficult for me to push Metro at the moment because being cheap is not good enough.”

Koch, who succeeded Eckhard Cordes (MEO) <http://www.bloomberg.com/apps/quote?ticker=MEO:GY> as CEO on Jan. 1, has to determine whether the Dusseldorf-based company needs to keep together a compendium of businesses that includes Kaufhof, Saturn and Media Markt electronics outlets, Real supermarkets and the Cash & Carry wholesale unit. With Metro’s Shape 2012 cost-saving program expiring this year, the executive also needs to come up with new financial goals for the retailer.

“Metro is a big dilemma for me at the moment,” said Marc Renaud, who manages about 850 million euros ($1.1 billion) atMandarine Gestion <http://www.mandarine-gestion.com> in Frankfurt <http://topics.bloomberg.com/frankfurt/> and is considering selling the stock, which represents 3.7 percent of his portfolio. “I want to be reassured that the new CEO has clear goals. Metro is cheap, but without a clear strategy it becomes a value trap.”

Subject of Debate

Metro said last year that it hasn’t decided whether to sell the Real chain, which accounts for 17 percent of sales <http://www.bloomberg.com/apps/quote?ticker=MEO:GY> and has been losing market share to competitors including the Aldi and Lidl discount chains. On Jan. 17, it said that selling Kaufhof (MEO) <http://www.bloomberg.com/apps/quote?ticker=MEO:GY> remains part of its strategy after halting negotiations to dispose of a business that it has sought to exit since 2008.

The future of the Media-Saturn electronics unit has also been the subject of debate. Metro said in August that it had no plan to sell the division after Capital magazine reported that Media Markt founder and minority shareholder Erich Kellerhals (MEO) <http://www.bloomberg.com/apps/quote?ticker=MEO:GY> was in talks with financial investors to buy a majority stake.

“Koch has two things to do,” said Thomas Effler, an analyst at WestLB AG in Frankfurt. “On the one hand, he needs to decide what kind of assets the company wants to focus on and on the other hand, he has to improve operations.”

Analyst Recommendations

The consensus analyst recommendation <http://www.bloomberg.com/apps/quote?ticker=MEO:GY> of 3.36 on a scale of 1 to 5 is the lowest since March 2010, according to Bloomberg data. Eight analysts recommend selling the stock while 22 advise holding it and 15 have a “buy” rating. Commerzbank AG cut its recommendation to “reduce” from “hold” on Jan. 18 because of“poor expansion momentum” at Cash & Carry.

Mandarine Gestion’s Renaud wants Koch to commit to selling Kaufhof and to focus on units that are “more oriented towards emerging-markets,” such as the 728-store Cash & Carry chain.

“I like the concept of Cash & Carry, whose concept is adapted to countries with low purchasing power,” Renaud said.

Sales at Cash & Carry, Metro’s biggest unit <http://www.bloomberg.com/apps/quote?ticker=MEO:GY> , rose to 31.2 billion euros in 2011 from 31.1 billion euros the year before, driven by growth in Russia and China <http://topics.bloomberg.com/china/> , Metro said Jan. 17.

The future of the Real supermarket unit is the “main question” that Koch needs to answer, according to Robert Greil <http://topics.bloomberg.com/robert-greil/> , an analyst at Merck Finck & Co. in Munich.

Media-Saturn Decline

Sales at the unit fell 2.3 percent to 11.2 billion euros in 2011 because of weak non-food revenue and “consumer reticence in Poland and Romania <http://topics.bloomberg.com/romania/> ,” Metro said this month.

The 426-store discount retailer “is not really focused in the non-food sector and clients are not too convinced to go shopping there,” WestLB’s Effler said.

Koch also needs to address declining sales at Media-Saturn, where revenue fell 1 percent at local currency rates in 2011. The Saturn chain started selling electrical goods online in October, a decade after Amazon.com Inc. (AMZN) <http://www.bloomberg.com/apps/quote?ticker=AMZN:US> entered the market, and should be joined this month by Media Markt.

A “transparent” successor to Cordes’s Shape cost-cutting program is also needed, according to Silvia Quandt’s Josefson.“One criticism of Shape updates was that there was no way of investors judging progress from the outside,” he said.

Cordes initiated Shape, a plan aiming at boosting profit by 1.5 billion euros over four years, in 2009. Metro reiterated on Jan. 17 that earnings <http://www.bloomberg.com/apps/quote?ticker=MEO:GY> before interest, taxes and special items in 2011 were “slightly below” 2010’s 2.4 billion euros.

Investors, recognizing the attraction of the stock’s valuation, will be looking for an indication of Koch’s plans when the company reports full-year earnings on March 20.

“We have no holdings so far, but are waiting for a good opportunity to step in,” said Thilo Mueller, who helps manage 120 million euros at MB Fund Advisory GmbH in Limburg, Germany.
<http://topics.bloomberg.com/germany/> .

To contact the reporter on this story: Julie Cruz in Frankfurt at jcruz6@bloomberg.net;

To contact the editor responsible for this story: Sara Marley at smarley1@bloomberg.net