Interest rates may have peaked in Australia and seem to have peaked in the US. The next move by central banks, while it could take time, may be down. I think it's a good idea to start thinking about which ASX shares could benefit when interest rates fall.
Businesses involved in household discretionary spending, housing renovations and construction could be beneficiaries in the future. That's partly why I really like the look of these three.
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Nick Scali Limited (ASX: NCK)
Nick Scali imports and sells high-quality furniture for "all budgets" at "unbelievably affordable prices", according to the company.
I think it's one of the best-run retailers on the ASX and usually reports an exceptionally high return on equity (ROE). It also has a generous dividend payout ratio.
I'm not sure how much demand for new furniture there's going to be over the next 12 months (and that's a relatively short timeframe), but I think Nick Scali could be more resilient than some investors think. FY19 was a weak year for house prices, but the ASX share managed to do surprisingly well with its sales and net profit after tax (NPAT).
I'm not expecting growth in FY24, but lower interest rates could be a catalyst for stronger spending by households on what Nick Scali sells. There could be more house purchases which can be a spark for buying new furniture as more people move into new homes, or at least new for them.
I also like the company's efforts to grow its store portfolio and increase its online sales, which can increase scale and profitability.
According to Commsec, it's trading at 13 times FY25's estimated earnings with a grossed-up dividend yield of 6.9%.
Brickworks Limited (ASX: BKW)
I believe all three of Brickworks' key divisions can benefit from lower interest rates.
Brickworks owns a lot of Washington H. Soul Pattinson and Co. Ltd (ASX: SOL). Lower interest rates could help the underlying value of Soul Pattinson's portfolio and share price, which could then help Brickworks shares.
Brickworks is best known for a number of different building products, including bricks and pavers, masonry and stone, roofing, cement and specialised building systems. Lower interest rates could spur more renovations and construction in Australia.
Finally, Brickworks owns a lot of commercial property land and warehouses. Lower interest rates may help support the value of all of this land, and perhaps increase development profits when the latest warehouses are completed (which increases the value of the real estate).
Metcash Ltd (ASX: MTS)
This ASX share may be best known as the supplier of food and drink to businesses like IGA, Foodland, Cellarbrations, The Bottle-O, IGA Liquor, Porters Liquor, Thirsty Camel, Big Bargain Bottleshop and Duncans.
It has another division that I think can particularly benefit from interest rates – the hardware division. Metcash owns the brands of Mitre 10, Home Timber & Hardware and Total Tools. It also supports small format convenience banners Thrifty-Link Hardware and True Value Hardware, as well as a number of un-bannered independent operators.
After making acquisitions and organic growth, Metcash has grown this division into its most profitable segment. In the first half of FY24, it generated underlying earnings before interest and tax (EBIT) of $110.6 million from hardware and $101.7 of underlying EBIT from food.
Therefore, a rebound of spending growth on hardware (and related categories) could be very beneficial for the ASX share's overall profitability.
The valuation looks very reasonable to me, which is partly why Metcash shares could be my next investment.
According to the estimate on Commsec, the Metcash share price is valued at 12 times FY24's estimated earnings with a potential grossed-up dividend yield of 8.4%.
