The ASX retail share Metcash Ltd (ASX: MTS) has seen significant share price falls lately. I think this makes the company a good value investment — and its large dividend is a bonus.
Metcash may not be the most well-known retailer, but it's an essential part of the supply chain for many other businesses in Australia.
The ASX share distributes food to IGA supermarkets around Australia and supplies liquor to various independent liquor retailers, including Cellarbrations, The Bottle-O, IGA Liquor, and Porters Liquor.
Metcash also has a hardware division, which includes Mitre 10, Home Timber & Hardware, Total Tools, Alpine Truss and Bianco Construction Supplies.
Weak FY24
The construction industry is facing a tough environment with high building costs and elevated interest rates. This backdrop is hurting demand for Metcash's hardware businesses.
Metcash recently reported its FY24 result, which showed hardware earnings decreased by 3.8% to $210.9 million. Management thought this was a good performance amid "softer external conditions that included a rapid decline in builder confidence and increased competitive pressure." It said the ASX retail share had grown its market share and was "ideally positioned for an improvement in activity levels".
Total revenue increased by 0.7% to $15.9 billion, while underlying net profit after tax (NPAT) dropped 8.2% due to hardware challenges and a higher cost of debt. Net debt at the end of FY24 was $251.9 million, and after the financial year-end, it paid $390 million for the purchase of Superior Foods.
The market largely expected this result, which is partly why the Metcash share price had drifted lower since mid-March. The share price has fallen 12.5% since 14 March, so it's materially cheaper and might now be worth considering as an investment.
Is the ASX retail share a buy for the yield?
In the first few weeks of FY25, the hardware segment continued to perform "better than its softer addressable market… demonstrating its resilience and the successful execution initiatives."
Despite those issues, total hardware sales grew 0.6% in the first seven weeks of FY25, partly due to the Superior Food acquisition.
Metcash's total sales, including two weeks of Superior Food sales, increased 2.2%. It's a challenging environment, but Metcash is managing to continue to grow.
When economic conditions improve in Australia, that could lead to a turnaround in earnings momentum for the hardware division. However, I'm not expecting an interest rate cut in the next few months, so it's important to be patient with our investments.
The broker UBS estimates that Metcash could pay an annual dividend per share of 19 cents per share in FY25, which would be a grossed-up dividend yield of just under 8%.
After that, UBS has forecast the annual dividend could grow by 1 cent per share per year to FY29. The projected 23 cents per share dividend in FY29 could translate into a grossed-up dividend yield of 9.4%.
I think the company's valuation is very attractive, considering profit is expected to rise steadily each year between FY25 and FY29. The Metcash share price is valued at just 13x FY25's estimated earnings. I'd be very happy to buy (more) Metcash shares today.
