The ASX retail stock Metcash Ltd (ASX: MTS) has seen its share price drift close to a 52-week low. For a few different reasons, this could be a good time to invest in this company.
Metcash may not be the most well-known brand in Australia, but it serves some very recognisable customers.
Metcash's food segment supplies IGA supermarkets around Australia, and the liquor division is the second largest supplier of liquor in Australia, supplying 85% of independent stores nationwide, such as Cellarbrations, IGA Liquor, Bottle-O, Thirsty Camel and Porters.
The ASX retail stock also has a number of hardware businesses, including Mitre 10, Home Hardware, Hardings, Total Tools, Alpine Truss and Bianco Construction Supplies.
Now that I've described what the business does, I'm going to talk about why it could be an appealing investment today.
Low valuation of ASX retail stock
The Metcash share price is down more than 20% since April 2022, as we can see on the chart below. I'd prefer to buy when share prices are lower rather than higher.
With this sort of business, which has significant exposure to the economy, I think it could be a good idea to invest while construction activity is being impacted by the current financial environment amid high interest rates and elevated inflation.
If/when conditions improve, I think the market will be quick to readjust Metcash shares to reflect that improved reality.
In my eyes, the right time to invest in businesses with cyclical earnings is when the market is pessimistic, such as in the current era.
At this lower Metcash share price, I think it looks appealing because it's in a good position to make larger profits in the future. One method to help profit growth is expanding its store networks. For example, Total Tools opened eight new stores in FY24, and it said it was on track to deliver its ambitious growth plan of 145 stores by FY26, with a longer-term target of at least 170 stores.
According to Commsec's profit forecast, the Metcash share price is valued at 14x FY25's estimated earnings.
Ongoing diversification for ASX retail stock
I like the acquisitions that the ASX retail stock has made in recent times, including hardware businesses Alpine Truss and Bianco Construction Supplies.
Those deals increase the size of the Metcash hardware division, diversify the products it sells, and improve its geographic spread of earnings. Metcash says it expects to extract more than $5 million of annual synergies from these two businesses.
For me, the most appealing acquisition was another business called Superior Foods, a leading Australian food service distribution business. This cements Metcash's position as the largest wholesaler and distributor of food to independent businesses in Australia. Metcash expects to achieve at least $14 million of annual synergies from this business.
Metcash said this acquisition will also benefit its customers, who will have an expanded catalogue and be able to access more items more often, while suppliers will benefit from access to a larger customer base.
The ASX retail stock also noted the food service industry is a fast-growing market, underpinned by favourable long-term consumer trends towards convenience and out-of-home dining.
Superior Foods gives Metcash another growth avenue for the years ahead.
Big dividends
The company is committed to a generous dividend payout ratio of 70% underlying net profit after tax, which I think strikes the right balance between rewarding shareholders and retaining some profit for investing for growth.
While we wait for a recovery, the dividends can provide solid returns.
According to the forecast on Commsec, Metcash has a grossed-up (including franking credits) dividend yield of 7.3% in FY25.
Overall, I think this could be a good time to consider this ASX retail stock, though a rebound may take some time.
