Divide and rule

Metro cashback would spice up slow-mo turnaround

German retail giant Metro needs more pep. The group is suffering from lacklustre sales growth and thin margins. Third-quarter operating earnings fell 17 per cent year-on-year, it announced on August 6. Metro's large Russian business is a particular concern, and while Chief Executive Olaf Koch's revamp is bearing some initial fruits, progress seems too slow to end the shares' chronic underperformance. A special dividend looks like the best way to boost investor morale.

Despite a 24 per cent increase in its share price this year, Metro trades at a discount to peers. Its stock is valued at 15.1 times forward earnings, compared to a sector average of 17.1, Thomson Reuters data shows. Since Koch took over in 2012, the stock has gained just 8 per cent. The wider German market is up 92 per cent over the same period.

Under Koch, Metro has become leaner and more focused. It sold its Kaufhof department stores in Germany, supermarkets in eastern Europe and Turkey, and wholesale markets in several countries. Those divestments should leave net debt at around euro 3 billion, less than one year's EBITDA.

Reviving Metro's business is harder than fixing the balance sheet. With an operating margin of just 0.8 per cent in the first nine months of its business year, its German supermarkets are barely profitable.

The cash-and-carry wholesale unit, which generates half of the group's sales and is big in Russia, has been hit hard by that country's recession. The weak rouble has dented operating profit by euro 100 million in the first three quarters.

Consumer electronics retailer Media-Saturn, which gained market share and increased its operating margin by 0.6 percentage point to 1.9 per cent, is for now the group's most appealing feature.

Koch wants to use the proceeds from asset disposals to invest more and buy small rivals, as in the $290 million purchase of Singapore-based food service distributor Classic Fine Foods Group. But that isn't enough to revive a disappointing valuation. A special dividend - affordable thanks to the stronger balance sheet and low interest rates - could buy Koch time to rustle up a more exciting performance.