Are these 2 cheap ASX shares undervalued?

These 2 cheap ASX shares could be undervalued.

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Key points

  • Quality retail ASX shares can be priced cheaply compared to their profit
  • Citi thinks Super Retail can benefit from a strong retail environment for longer
  • Accent Group is liked by UBS with its store rollout and higher profit margin potential

Cheap ASX shares aren’t always necessarily great value. But, there could be plenty of opportunities that could be smart buys whilst also being cheap.

A number of businesses in the physical retail space on the ASX are often priced at a low price/earnings ratio (p/e ratio).

Could they be attractive opportunities?

Super Retail Group Ltd (ASX: SUL)

Super Retail is one of the largest retailers in Australia and New Zealand. It owns four key brands: BCF, Macpac, Rebel and Supercheap Auto.

Looking at the valuation, the broker Citi thinks that the Super Retail share price is priced at 13x FY23’s estimated earnings. Citi rates the ASX share as a buy with a price target of $16. That’s more than 30% higher than where it is today.

The broker thinks that retail sales are going to be stronger for longer and it thinks the end of full lockdowns is a positive, though supply chain impacts could be problematic in the shorter-term.

In October 2021 it gave a trading update for the first 16 weeks of FY22. Despite lockdowns in Victoria and NSW, group sales were only down by 12% and compared to FY20 sales were up 10%. Online sales were up 96% and represented nearly a third of group sales.

The gross profit margin improvement that was achieved in FY21 was sustained in the first 16 weeks of FY22. However, it noted that margins could be impacted with the challenging supply chain.

Accent Group Ltd (ASX: AX1)

Accent Group is a large shoe retailing business which sells through a large number of brands, with both ones that it owns and ones that it’s a distributor for. Some of those brands include: CAT, Dr Martens, Glue, Hype, Merrell, Pivot, Platypus, Skechers, Stylerunner, The Athlete’s Foot, Trybe, Timberland and Vans.

It is currently valued at 13x FY23’s estimated earnings by UBS. The broker rates Accent as a buy, with a price target of $3. That’s a potential upside of more than 35% this year if the broker is right.

The broker thinks that Accent can benefit with all of its stores open again, as well as longer-term growth of its profit margins.

Accent is continuing to grow its store network, which can be an important part of revenue and profit growth. By the end of FY22, it’s expecting to have more than 700 stores in Australia and New Zealand.

The ASX share is also growing its digital sales. In the first quarter of FY22, during the NSW and Victoria store closures, digital sales were up around 65%, with conversion rates rising driven by improved customer targeting and website capability. It wants online sales to be at least 30% of sales over time.

It’s also seeing some growth of some brands internationally. For example, Stylerunner now ships internationally to the USA, Singapore and Hong Kong. It’s seeing strong early results and it’s watching and testing the US market closely.

It also recently signed an exclusive distribution agreement in Australia and New Zealand for Reebok, for an initial 10-year term.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Super Retail Group Limited. The Motley Fool Australia owns and has recommended Super Retail Group Limited. The Motley Fool Australia has recommended Accent Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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