The Australian share market presents several opportunities, particularly among stocks that appear undervalued based on their current price-to-earnings (P/E) ratios. While some high-performing businesses maintain elevated P/E ratios due to strong earnings growth, there are also companies trading at lower valuations that might offer substantial returns as their earnings improve.
Here are three ASX value stocks currently trading at relatively low valuations that are expected to experience profit growth in the near future:
Adairs Ltd (ASX: ADH)
Adairs Ltd, known for its furniture and homewares brands including Adairs, Mocka, and Focus on Furniture, has seen its share price decline by over 20% since March 2024 and approximately 60% from its peak in 2021. This drop reflects broader challenges in the retail sector, particularly as some households face financial difficulties.
However, the retail sector is expected to recover eventually. Recent positive updates from retailers such as Universal Store Holdings Ltd and Michael Hill International Ltd suggest that improving sales numbers may signal a turnaround.
Projections indicate that Adairs' earnings per share (EPS) could increase by 32% between FY24 and FY26. This would place the stock at a valuation of under 8 times FY26’s estimated earnings. Potential growth drivers for Adairs include expanding its store network, enhancing store efficiencies, and optimizing its new national distribution center.
Kelsian Group Ltd (ASX: KLS)
Kelsian Group Ltd operates as a major multimodal transport and tourism provider, managing a fleet that includes 5,500 buses, 115 vessels, and 24 light rail vehicles across multiple countries. The company’s share price has fallen 26% over the past year and has halved since April 2021.
Despite these challenges, Kelsian is well-positioned for future growth. The company has reported a 29.4% increase in underlying earnings before interest and tax (EBIT), reaching $58.1 million. Kelsian’s potential for growth is bolstered by new routes, economies of scale, and global procurement opportunities.
Forecasts suggest that Kelsian’s EPS could grow by 38% between FY24 and FY26, resulting in a valuation of under 12 times FY26’s estimated earnings.
Metcash Ltd (ASX: MTS)
Metcash Ltd, a significant supplier to IGA supermarkets and various liquor brands, as well as a major player in the hardware sector with brands like Mitre 10 and Home Timber & Hardware, has seen its share price decrease by 10% since March 2024 and around 25% from April 2022.
The company’s hardware segment is currently under pressure due to weak construction and renovation conditions amid high interest rates. However, a potential recovery could be on the horizon if interest rates decline in the future.
Current estimates suggest that Metcash's EPS could rise to 30 cents, with the stock valued at approximately 12 times FY26’s forecast profit.
These ASX stocks, while currently undervalued, have promising prospects for profit growth. Investors may find opportunities in these companies as they navigate through challenging conditions and capitalize on future growth. Evaluating these stocks based on their potential earnings increases and market position could offer valuable insights for investment decisions.