High interest rates have impacted demand for a number of companies. I'm going to write about three ASX shares that I think could see a recovery if and when the Reserve Bank of Australia (RBA) starts cutting interest rates.
Some ASX companies have done remarkably well despite the headwinds they're facing. I think a fall in the interest rates may mean earnings are boosted and investors are willing to pay for a higher price/earnings (P/E) ratio.
Here's why I'm optimistic about these three ASX shares.
Beacon Lighting Group Ltd (ASX: BLX)
Beacon Lighting describes itself as a leading national and international provider of innovative, technologically advanced and energy-efficient lighting and cooling solutions. It may be best known for lighting, but it also claims to have the largest range of fans in Australia. Many of the company's product ranges are exclusive to Beacon.
I think lower interest rates could spur demand for household renovation and construction, which could flow into demand for Beacon products.
Beacon also has a sizeable and growing international division – this is exciting because of the scale of the markets in North America and Asia. If Australian rates fall, it could weaken the Australian dollar, which would increase the value of those international sales in Australian dollar terms.
According to the forecast on Commsec, the Beacon Lighting share price is valued at 19x FY24's estimated earnings.
Reece Ltd (ASX: REH)
Reece claims to be Australia's largest plumbing and bathroom supplies business. It has an expansive network of showrooms in Australia, and it also has a growing presence in the United States after an acquisition a few years ago. Reece is also involved in irrigation, pools, HVAC and civil works in Australia.
The ASX share is another name that could benefit from a recovery in renovation and construction activity in Australia (and the US) if central bank interest rates fall.
Reece is planning to open between 10 to 15 branches per year in the US, which could be a useful tailwind for earnings (and be boosted by a weaker Australian dollar if rates fall). The company is working on non-plumbing network expansion in Australia and New Zealand.
From the outside, Reece appears to be well-managed, and in three to five years, I think the business could be making a lot more profit.
According to the forecast on Commsec, the Reece share price is valued at 42x FY24's estimated earnings.
Metcash Limited (ASX: MTS)
Metcash is a diversified business with food, liquor and hardware earnings. It supplies independent retailers around the country including IGA supermarkets, Cellarbrations, The Bottle-O, IGA Liquor, Porters Liquor, Thirsty Camel, Big Bargain Bottleshop and Duncans.
What excites me most about this business is the hardware division, which includes Total Tools, Home Timber & Hardware and Total Tools. It also supports independent operators under the small format convenience banners Thrifty-Link Hardware and True Value Hardware. I believe this division can benefit substantially if interest rates are cut by the RBA.
While the hardware operations aren't as strong as Bunnings, I think they are worthy competitors. The Metcash share price is only trading at 13x FY24's estimated earnings, according to Commsec. I think this is a low P/E ratio for the quality of the business.
The ASX share also recently announced the acquisitions of Superior Food (a leading Australian foodservice distribution business), Bianco Construction Supplies (a business operating in SA and NT), and Alpine Truss (one of the largest frame and truss operators in Australia). These companies can help diversify and grow earnings.
