I love finding Australian value stocks that the market is undervaluing. I'm going to write about three ideas I think the market is ignoring.
In my mind, a value stock is a business that has a relatively low price/earnings (P/E) ratio which could easily be trading on a higher valuation. I like businesses that pay dividends because a low valuation usually means a higher dividend yield – we can get a good return that way.
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KMD Brands Ltd (ASX: KMD)
KMD is a business that operates three brands – Kathmandu, Rip Curl and Oboz, which are essentially retailers that are focused on outdoor clothing and footwear, for cold and hot weather. I'll point out that this business is a New Zealand business, but it's listed on the ASX and makes a lot of its sales in Australia, so I'm going to call it a New Zealand (and Australian) value stock.
As you might expect, sales have weakened amid the current inflationary environment and higher interest rates.
The KMD Brands share price has fallen 60% from November 2021, so it's much better value now. I don't think retail conditions are going to be weak forever, though it could take a year or more until households are able/willing to start spending more again.
But, I think KMD Brands is priced at a very cheap level for that possible rebound. According to the projections on Commsec, it's valued at 7 times FY26's estimated earnings and it could pay a possible dividend yield of almost 10% that year.
Lindsay Australia Ltd (ASX: LAU)
This business is a sizeable and growing player in the transport and logistics space. It claims to be a leading national service provider to the agriculture, horticulture and food-related industries. It can assist farmers grow, package, transport and distribute their produce throughout Australia and globally.
Despite steadily growing revenue over the past five years, and focusing on more growth for the long-term, the Australian value stock is priced at a cheap level in my opinion.
According to Commsec, it's priced at 7.2 times FY25's estimated earnings and 6.6x FY26's estimated earnings. It's priced so cheaply that the fairly low projected dividend payout ratio could lead to a grossed-up dividend yield of 8.5% in FY25 and 8.9% in FY26.
The business is priced cheaply, it's indirectly benefiting from the growing population and it offers a large dividend yield. There's also a possibility it could grow via acquisitions, which would boost scale.
Metcash Ltd (ASX: MTS)
Metcash supplies IGA supermarkets around Australia, as well as a large number of independent liquor retailers like Cellarbrations, The Bottle-O, IGA Liquor, and Porters Liquor.
The business has a very promising hardware division which includes Mitre 10, Home Timber & Hardware and Total Tools.
I believe population growth is a useful tailwind for all three of the Australian value stock's main segments, with potential interest rate cuts being a possible booster for hardware earnings.
While it's not as strong as Coles Group Ltd (ASX: COL) or Wesfarmers Ltd's (ASX: WES) Bunnings, I think it's comparable, but trades on a much cheaper P/E ratio.
According to Commsec, the Metcash share price is valued at just 12 times FY25's estimated earnings with a possible grossed-up dividend yield of 8.3% for that year.
It is valued at 11.8 times FY26's estimated earnings with a possible grossed-up dividend yield of 8.6%. Those numbers are attractive to me, which is partly why I recently invested.
