Metcash Ltd, an ASX retail stock, has recently experienced notable declines in its share price, which has led to discussions about its potential as a value investment. With the company’s shares down significantly, its current valuation, combined with its substantial dividend yield, presents an interesting opportunity for investors.
Metcash Ltd (ASX: MTS)
Metcash is a key player in the Australian retail sector, though it may not be as widely recognized as some of its peers. The company plays a crucial role in the supply chain by distributing food to IGA supermarkets across Australia and providing liquor to various independent retailers, including Cellarbrations, The Bottle-O, IGA Liquor, and Porters Liquor. Additionally, Metcash operates a hardware division that includes well-known brands such as Mitre 10, Home Timber & Hardware, Total Tools, Alpine Truss, and Bianco Construction Supplies.
Recent Performance and Challenges
In its FY24 report, Metcash faced a challenging environment, particularly in its hardware division. The construction industry has been struggling with high building costs and elevated interest rates, leading to decreased demand for hardware products. As a result, hardware earnings fell by 3.8% to $210.9 million. Despite this, Metcash management viewed the performance as solid given the tough external conditions, noting that the company had managed to increase its market share and is well-positioned for future improvements in activity levels.
The company’s total revenue for FY24 saw a modest increase of 0.7% to $15.9 billion. However, underlying net profit after tax (NPAT) dropped by 8.2% due to the difficulties in the hardware segment and higher debt costs. Net debt stood at $251.9 million by the end of FY24, and subsequent to the financial year-end, Metcash acquired Superior Foods for $390 million.
Since mid-March, Metcash’s share price has fallen by 12.5%, reflecting the market's anticipation of these results. With the share price now significantly lower, it may present an opportunity for those looking to invest.
Dividend Prospects
Looking ahead to FY25, Metcash is expected to maintain a robust dividend payout. The projected annual dividend per share is 19 cents, which translates to a grossed-up dividend yield of just under 8%. This is a notable feature for income-focused investors. Over the following years, dividends are forecasted to grow, with an anticipated annual increase of 1 cent per share each year, potentially reaching 23 cents per share by FY29 and yielding 9.4%.
Despite the current economic challenges, including persistent high interest rates, Metcash has managed to demonstrate resilience. The company’s ability to maintain and grow its dividends, coupled with its attractive valuation of around 13 times estimated earnings for FY25, suggests that it could be an appealing option for those seeking both value and income.
As the economic landscape evolves and conditions improve, Metcash’s hardware division might see a turnaround in earnings. For those considering long-term investments, Metcash offers both a solid dividend yield and potential for future growth.