2 ASX shares rated as strong buys by brokers

Metcash and Austal are two ASX shares that brokers really like at the moment.

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There are a number of ASX shares that many brokers like the look of.

If multiple brokers all think that a business is an opportunity, then it could be worth thinking about if that business is an investment idea There’s also potential for all of the brokers to all be wrong at the same time.

Here are two ASX shares that are highly rated by brokers:

Metcash Limited (ASX: MTS)

Metcash is currently rated as a buy by at least three brokers.

One of the brokers that likes Metcash is Credit Suisse, which has a price target of $4.16.

The broker is paying attention to how the non-food earnings of the business are growing, particularly the hardware segment.

The ASX share recently reported its FY21 result. It reported revenue was up around 10%, with group underlying earnings before interest and tax (EBIT) up 19.9% and underlying net profit up 27.1%.

Hardware saw a stronger growth with sales growth of 24.7% to $2.6 billion with “significant” growth in DIY sales and a return to growth in trade. Online sales went up 122%. Hardware EBIT increased 61.5% to $51.8 million with the EBIT margin increasing 130 basis points to 5.3%.

Metcash increased its ownership of Total Tools from 70% to 85% for an acquisition cost of $59.4 million.

The broker also pointed to the higher dividend payout ratio, the buyback and attractive valuation as reasons to like Metcash.

According to Credit Suisse, Metcash is valued at 15x FY22’s estimated earnings.

Austal Limited (ASX: ASB)

Austal is a shipbuilding business. It’s currently rated as a buy by at least three brokers.

One of the brokers that likes the shipbuilder is Credit Suisse. The broker points to success with US contracts as a reason to be positive. It has a price target of $2.75, which suggests a potential upside of more than 30% over the next 12 months.

For example, it recently announced it had been awarded a US$44 million Littoral Combat Ship (LCS) contract modification.

The ASX share also announced that it had been awarded a US$44 million contract modification for the design, procurement, production implantation and demonstration of autonomous capability on Expeditionary Fast Transport (13), the future USNS Apalachicola.

In terms of guidance, Austal said a couple of weeks ago that it’s expecting to generate FY21 EBIT of between $112 million to $118 million. That was a reduction of guidance due to delays experienced on programs and associated costs caused by COVID-19 related border closures, travel restrictions and resourcing challenges that are impacting Austal shipbuilding operations in Australia and the Philippines.

According to the Credit Suisse estimates, Austal is valued at 9x FY22’s estimated earnings.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and has recommended Austal Limited. 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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